Feb 19, 2010 12:49 pm


On Thursday, Ben Bernanke followed in the footsteps of Barack Obama. The president announced that he is sending 30,000 more troops to Afghanistan in order to withdraw in a year. The Fed announced a raise in interest rates but it should not be interpreted as a change in monetary policy. One contradictory announcement is as believable as the other.

Just as Obama delayed sending troops as long as he could so did Bernanke. Taliban progress forced Obama's hand; A bad bond sale forced Bernanke's hand. Why else would he raise rates when we are teetering on the edge of deflation and the price of dollar is rising in relation to the Euro? Last month Core Consumer Prices Fell for First Time Since 1982 as "prices fell for hotel rooms, home ownership costs, new cars, airfares and clothing" and given the current slack in the economy, are expected to continue to do so.

That is the reason, Bernanke's tightening is"surprising" to those who do not take into consideration the recent global response to the bond offering. It is clear that the Chinese took one look at Obama's irresponsible budget and not only stopped buying dollars, they began selling them and scared the markets. With his"surprise" rate hike, Bernanke hopes to convince the Chinese, Arabs and the like that he can be trusted not to inflate the dollar to solve the country's souring debt problem. The next bond sale will tell if the move worked.

In the meantime. Sang Moon is right to note that:

If core prices exclude food and energy, doesn't that mean that core prices are effectively mostly non-essential goods? This means that inflation is increasing for essential goods which is sucking money and demand from non-essential goods which would result in lowering core prices. This means inflation is indeed increasing for the things that matter to most people.

Of course, no demand means no growth and no jobs. Not that economists get it. They continue to be surprised: US new jobless claims post surprise jump. Even worse, the president who was supposed to focus like a laser on jobs, refuses to give up on his job destroying efforts to pass an expensive health care plan.

comments powered by Disqus