The world’s most influential banker tries (and fails) to convince us that his money printing isn’t what’s causing commodity prices to skyrocket.
US Federal Reserve Chairman, Ben Bernanke, gave a speech at the International Monetary Conference on Tuesday during which he did his best to deflect blame away from him and his institution. He began by claiming that the rising cost of food, oil and other commodities was being caused by strong demand growth from emerging markets as well as lagging supply growth.
Bernanke believes that the Fed’s policies of quantitative easing (money printing) and near zero interest rates are not behind the huge rise in commodity prices which is causing dramatic rises in the cost of living across the world – a phenomenon which is in danger of derailing the fragile global recovery.
During the speech Bernanke used is favourite word, ‘transitory’, to play down fears of inflation saying that he and the other members of the Federal Open Market Committee (FOMC) “expect inflation to remain subdued in the medium term.” He did however concede that “the rise in commodity prices has directly increased the rate of inflation while also adversely affecting consumer confidence and consumer spending”.
As for the rise in oil prices, Bernanke shifted the blame on to OPEC for not increasing production. Drivers in the US are paying $4 a gallon for petrol, while here in the UK we are now paying the equivalent of nearly $10 a gallon. This, combined with dramatic rises in the cost of grains, base metals and soft commodities such as coffee, is impacting consumer spending and therefore GDP.
Many blame the US for exporting its inflation to the rest of the world, especially to China which pegs its currency to the dollar. As the Fed prints money, Chinese authorities must also create more currency in order to maintain the exchange rate. This results in more money chasing the same amount of goods and causes prices of those goods to rise. Fed-head Bernanke used the same speech to address this issue pointing to the US trade deficit as a “fundamental source of recent declines in the dollar’s value”. This argument was that the United States is a major oil importer and “any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar.” It was a nice try but the Bernanke then went on to say “The best way for the Federal Reserve to support the fundamental value of the dollar in the medium term is to pursue our dual mandate of maximum employment and price stability, and we will certainly do that.” With unemployment in the US running at almost 16% and the dollar falling over 14% in the past year, this last statement is laughable.
Viability of the dollar
The US dollar is the world’s reserve currency and since all commodities are denominated in US dollars, those buying commodities must first buy dollars. When the Fed prints money – and it’s printed almost $2 trillion since the financial crisis began – the value of the dollar declines and therefore those buying raw materials require more dollars to purchase them. The higher cost of commodities raises the cost of producing finished goods, and sooner or later these higher prices are passed along to the consumer.
Despite what Bernanke says in his speeches and press conferences, it’s clear that much of the commodity driven inflation in the world today results from his actions at the helm of the Fed. The long-term viability of the US dollar is already being called into question and if fiscal and monetary responsibility is not restored soon the Fed risks a Greek style moment when its creditors demand much higher rates for financing its massive deficits.