The Fed's Latest, Greatest Round of Asset Inflation

There goes oil, surging past $80-a-barrel. That’s up 150 percent from the December low, in case you’re keeping score.

Gasoline? Wholesale prices are up more than 40 cents a gallon in just under a month …

Heating oil? Grab an extra blanket! It just jumped to the highest price in almost a year …

Corn? It’s up almost a buck a bushel since mid-September …

Wheat? Rising. Soybeans? Yep. Sugar? Near a 26-year high. And I hope you’re not planning on eating too much chocolate this Halloween. Replacing it will cost a lot more considering cocoa futures just soared to the highest level in almost three decades.

Rising commodity prices mean bigger bills when you shop.

But for everyone else, it just means higher prices at the pump … a dramatic escalation in heating bills … pricier bread … more expensive cereal … and so on.

And you know what? Federal Reserve policymakers probably couldn’t be happier! They want prices to surge. In fact, they are deliberately pursuing reckless monetary policies and a strategy of dollar debasement in order to ENSURE we get yet another round of asset inflation!

The Definition of Insanity:
Doing the Same Thing Again and Again …
And Expecting a Different Result.

I always liked that quip about the definition of insanity. And as far as I’m concerned, it definitely applies to the Fed.

You’d think these men and women would get it.

You’d think that after helping inflate two gigantic asset bubbles in stocks and housing … then watching them blow up in their faces … they might change strategies.

You’d think they’d realize the problems inherent in flooding the economy with cheap and easy money. Or in eagerly slashing rates by huge margins at the first sign of trouble … but only reluctantly — and belatedly — raising them.

But no … it seems they’re determined to inflate yet another asset bubble, this time in just about everything!

The tidal wave of liquidity flooding out of the Fed is floating every boat out there. Commodities are the most obvious example. But the same principle applies to equities … junk bonds … emerging markets … and many foreign currencies. The carry trade is driving the action in anything and everything.

Foreigners “Fed” Up With the Money Flood —
But They Can’t Stem the Tide Alone …

So much funny money is flooding the world that more responsible foreign central bankers and policymakers are boiling over with anger. They’re warning the Fed to knock it off, and starting to take steps to stem the gains in their currencies against the greenback.

ECB President Trichet warned that “excessive volatility” in currency rates is “bad for economic development.”

* The Bank of Canada warned on Tuesday that “heightened volatility and persistent strength in the Canadian dollar are working to slow growth … the current strength in the dollar is expected, over time, to more than fully offset the favorable developments since July.” That was a clear attempt to talk down the Canadian dollar, affectionately known as the “loonie.”

* European Central Bank President Jean-Claude Trichet warned again about “excessive volatility” in exchange rates, while a French economic advisor said the current euro-dollar rate is a “disaster for the European economy.” More verbal intervention, this time targeted at the euro currency.

* In Brazil, the carry trade (borrow cheap dollars here, plow ‘em into higher-yielding Brazilian assets) is so out of control, the government just slapped a tax on foreign investors. A 2 percent levy will apply to foreign purchases of Brazilian fixed-income securities and stocks, effective immediately.

* Minutes of the latest Reserve Bank of Australia meeting showed that officials were very concerned about the side effects of recklessly easy money. Policymakers warned that a “very expansionary setting of policy was no longer necessary, and possibly imprudent.” The RBA surprised the world several days ago by raising Australia’s benchmark rate 25 basis points to 3.25 percent.

The Fed is showing no sign of tightening its “easy money” policy.

Heck, even the financial newsmagazine Barron’s published a cover story this past weekend urging Bernanke to raise the funds rate. Barron’s said the rate should increase from its current 0-to-0.25 percent range to 2 percent.

There’s just one problem: All of these guys are ultimately powerless against the Fed! Sure, they might win the occasional one- or two-day battle in the markets. But until the Fed joins the fight, they’re going to lose the war. And as I’ve told you repeatedly, the Fed shows no sign of having the motive, means, or political willpower to do what’s right.

So what’s going to happen?

The Fed is going to keep monetary policy “too easy” in order to inflate asset prices. And the carry trade will live on. If that makes our lives miserable by driving up the cost of living … the Fed just doesn’t care.

They’re apparently more worried about helping Goldman Sachs generate the biggest quarterly profit in the firm’s history.

Until next time,

Mike

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