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Tags: dollar

France Downgraded by S&P

Published on: 01/13/2012

Categories: Economics, Financial Markets, Foreign Exchange Markets

Tags: dollar, European debt crisis, gold, gold standard, money, Ron Paul, who caused the european debt crisis, why should we have a gold standard

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Editor’s Note: As long as the bankers don’t get their way, the downgrades and raids on national treasuries / economies will continue. When they bankers get their way, the pain stops. Just go back and take a look at the chronology of what has happened over the past several years and it becomes very obvious.

Standard & Poor’s has downgraded France’s credit rating, French TV reported Friday, while several other euro zone countries face the same fate later in the day, according to reports.

Germany and the Netherlands aren’t among those facing a downgrade, a senior euro zone government source told Reuters. Another source confirmed “several” countries would be hit.

“Remain alert tonight when U.S. markets close,” said another euro zone source.

US stocks slumped in reaction to the report that S&P had downgraded France. European shares also extended their decline.

In December, S&P placed the ratings of 15 euro zone countries on credit watch negative— including those of top-rated Germany and France, the region’s two biggest economies—and said “systemic stresses” were building up as credit conditions tighten in the 17-nation bloc.

Since then, the European Central Bank has flooded the banking system with cheap three-year money to avert a credit crunch. At the time, the U.S.-based ratings agency said it could also downgrade the euro zone’s current bailout fund, the EFSF.

“The consequence (if France is downgraded) is that the EFSF cannot keep its triple-A rating,” said Commerzbank chief economist Joerg Kraemer.

“That may irritate markets in the short term but wouldn’t be a big problem in a world where the U.S. and Japan also don’t have a triple-A rating anymore. Triple-A is a dying species,” he said.

S&P has said that if a downgrade did materialize, countries such as Germany, Austria, Belgium, Finland, the Netherlands and Luxembourg would likely see ratings cuts of only one notch.

The other nine countries—most notably triple A-rated France—could suffer downgrades of up to two notches.

A spokesperson for S&P in Paris declined to comment on the reports. A French financy ministry spokesperson was not immediately available for comment.

John Wraith, Fixed Income Strategist at Bank of America Merrill Lynch told CNBC the confirmation of a mass downgrade would be another serious step in the crisis and would lead to a serious worsening of sentiment.

“To a large degree it’s widely anticipated,” Wraith said. “However, we think the reality of it is going to have a knock-on, ongoing impact on these markets.”

“It clearly deteriorates still further the credit worthiness of a lot of the European banks and just keeps that negative feedback loop between struggling banks and the sovereigns that may have to support them if things go from bad to worse in full force,” Wraith added.

A downgrade could automatically require some investment funds to sell bonds of affected states, making those countries’ borrowing costs rise still further.

“It’s been priced in for several weeks, but the market had been lulled into complacency over the holidays, and the new year began with a bounce in risk appetite, thanks partly to a good Spanish auction,” said Samarjit Shankar, Director Of Global Fx Strategy at BNY Mellon in Boston.

“But the Italian auction brought us back to earth and now we face the spectre of further downgrades.”

Italy’s three-year debt costs fell below 5 percent on Friday but its first bond sale of the year failed to match the success of a Spanish auction the previous day, reflecting the heavy refinancing load Rome faces over the next three months.

Banks Try to Stave off Euro Crisis with ‘Unlimited’ Loans

by TwoCentsEditor

Published on: 09/16/2011

Categories: Current Events, Economics, Financial Markets, Foreign Exchange Markets

Tags: andy sutton, banking syndicate, dollar, euro crisis, george soros, gold, jim willie, silver

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Fears of a deepening of Europe‘s debt crisis have prompted the world’s leading central banks to pump US dollars into the financial system, in a co-ordinated action designed to boost market confidence.

The Bank of England joined the US Federal Reserve, the European Central Bank, the Swiss National Bank and the Bank of Japan on Thursday to announce that they would flood money markets with dollars over the coming months.

The move, on the third anniversary of the collapse of the US investment bank Lehman Brothers, sent shares soaring in banks heavily exposed to debt default by Greece and the other struggling members of the 17-nation eurozone. The euro, which had been falling in recent days, rebounded, rising roughly 1% in European trading on Thursday.

Speaking in Washington, Christine Lagarde, the president of the International Monetary Fund, said: “They [the banks] are getting together and acting together. To me, that is the most important message.”

Lagarde warned that more action was needed.

“We have entered into a dangerous phase of the crisis,” she said. There is still a path to recovery, Lagarde said, but it is a “narrow” one.

Under the terms of the deal, banks will be able to bid for unlimited amounts of US dollars at fixed interest rates in three separate auctions. The first of these will be on 12 October.

Nick Parsons, head of strategy at National Australia Bank, said the decision to provide unlimited liquidity well into 2012 was a big show of support to the global banking system.

But he added: “If Greece were to default, an announcement that there would be unlimited liquidity available from central banks is one of the things you would want to have in place beforehand.”

The move comes as Europe’s finance ministers gather in Wroclaw, Poland, for a meeting of the Economic and Financial Affairs Council, known as Ecofin. US Treasury secretary Tim Geithner is set to address the meeting for the first time, and is expected to call for decisive action.

Putting further pressure on Europe’s finance ministers, the European Commission cut its growth forecast for the euro area for the rest of they year.

The commission predicted Europe would barely avoid a double-dip recession, and that growth would come to a “virtual standstill” towards the end of the year.

Gus Faucher, director of macroeconomics at Moody’s Analytics, said the move to pump dollars into the system would help in the short term, but all eyes were still on the meeting of European finance ministers.

“It’s not a cure; it’s a temporary palliative,” said Faucher. “The big question is: is this enough in the short term to get us to a longer term solution? There is a potential for a really huge financial crisis in Europe. Things are bad now, but they could get a lot worse.”

Hedge fund billionaire George Soros said the Euro crisis looked “more intractable” than the 2008 financial crisis. Writing in the New York Review of Books, Soros said it was “imperative to prepare for the possibility of default and defection from the eurozone in the case of Greece, Portugal, and perhaps Ireland.”

He said massive political changes were needed in Europe, including the establshment of a European Treasury, ” to forestall a possible financial meltdown and another Great Depression.”

In London, the FTSE 100 index closed up 110 points at 5337, over 2%. On Wall Street, the Dow Jones index gained even in the face of poor economic figures.

Markets in New ‘Danger Zone’: Zoellick

by TwoCentsEditor

Published on: 08/15/2011

Categories: Current Events, Economics, Financial Markets

Tags: banking cartel, creature from jekyl island, dollar, edward griffin, Federal Reserve, gold, IMF, silver, World Bank

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(Reuters) – The loss of market confidence in economic leadership in key countries like the United States and Europe coupled with a fragile economic recovery have pushed markets into a new danger zone, something that policymakers have to take seriously, the head of the World Bank said on Sunday.

Speaking at the Asia Society dinner in Sydney, Robert Zoellick also said the global economy was going through a multi-speed recovery, with developing countries now the source of growth and opportunity.

“What’s happened in the past couple of weeks is there is a convergence of some events in Europe and the United States that has led many market participants to lose confidence in economic leadership of some of the key countries,” he said.

“I think those events combined with some of the other fragilities in the nature of recovery have pushed us into a new danger zone. I don’t say those words lightly … so that policymakers recognize and take it seriously for what it is.”

Zoellick said the process of dealing with the sovereign debt problem and some of the competitive issues in the euro zone have tended to be done “a day late,” leaving markets worried that authorities may not be ahead of the problem or moving in the right direction.

“That (worry) has accumulated and so we’re moving from drama to trauma for a lot of the euro zone countries,” he said.

On the United States, Zoellick said it wasn’t fears the world’s biggest economy faced an imminent problem, but “frankly that markets are used to the United States playing a key role in the economic system and leadership.”

He said efforts to cut U.S. government spending have so far been focused on discretionary spending as opposed to the entitlement program such as social security. “Until they make an effort on those programs, there is going to be continued skepticism about dealing with long-term spending.”

Zoellick said while market confidence has been hit, the real issue was whether this will spread to business and consumer confidence, something that was still unclear.

“What is different from the world of the past is now emerging markets are sources of growth and opportunity. About half of global growth is represented by the developing world … so this is a very rapid change in a relatively short span of time in historical terms,” he added.

On China, Zoellick said the appreciation of the yuan would be constructive, especially in helping tackle the country’s inflationary pressure.

On Australia, he said the country was in a much better position than other developed countries because it undertook structural reforms. On the fiscal side, he noted Australia’s debt was only 7 percent of gross domestic product and taking advantage of its position in the Asia Pacific..

S&P Downgrades USGovt Credit Rating

by TwoCentsEditor

Published on: 08/05/2011

Categories: Current Events, Economics

Tags: alex jones, bonds, credit rating, debt, dollar, downgrade, gold, money, obama

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Standard & Poor’s announced Friday night that it has downgraded the United States credit rating for the first time, dealing a huge symbolic blow to the world’s economic superpower in what was a sharply worded critique of the American political system.

Lowering the nation’s rating one-notch below AAA, the credit rating company said “political brinkmanship” in the debate over the debt had made the U.S. government’s ability to manage its finances “less stable, less effective and less predictable.” It said the bi-partisan agreement reached this week to find $2.1 trillion in budget savings “fell short” of what was necessary to tame the nation’s debt over time and predicted that leaders would have no luck achieving more savings later on.

The decision came after a day of furious back-and-forth between the Obama administration and S&P. Government officials fought back hard, arguing that S&P made a flawed analysis of the potential for political agreement and had mathematical errors in its initial analysis, which was submitted to the Treasury earlier in the day. The analysis overstated the U.S. deficit over 10 years by $2 trillion.

“A judgment flawed by a $2 trillion error speaks for itself,” a Treasury spokesperson said Friday.

The downgrade will push the global financial markets into unchartered territory after a volatile week fueled by concerns over the European debt crisis and the slowdown in the U.S. economy.

Analysts say that, over time, the downgrade is likely to push up borrowing costs for the U.S. government, costing taxpayers tens of billions of dollars a year. It could also drive up costs for borrowing for consumers and companies seeking mortgages, credit cards and business loans.

A downgrade could also have a cascading series of effects on states and localities, including nearly all of those in the Washington metro area. These governments could lose their AAA credit ratings as well, potentially raising the cost of borrowing for schools, roads and parks.

But the exact impact of the downgrade won’t be known until at least Sunday night, when Asian markets open, and perhaps not fully grasped for months. Analysts say the impact on the markets may be modest because they have been anticipating an S&P downgrade for weeks.

Federal officials are also examining the impact of a downgrade in large but esoteric financial markets where U.S. government bonds serve an extremely important function. They were generally confident that markets would hold up, but were closely monitoring the situation.

S&P’s action is the most tangible vote of disapproval so far by Wall Street on the deal between President Obama and Congress to cut the deficit by at least $2.1 trillion over 10 years. S&P has said that it wanted at least $4 trillion of deficit reduction.

The downgrade is likely to be used as a weapon by both Republicans and Democrats as they argue the other side has not taken deficit reduction seriously.

Other credit rating agencies — Moody’s Investors Service and Fitch Ratings — have decided not to downgrade the United States credit rating. But they’ve warned that, if the economy deteriorates significantly or the government does not take additional steps to tame the debt, they could move to downgrade too.

In April, S&P first said it might downgrade the United States credit rating on concerns that lawmakers would not be able to come to a deal on reducing the debt. In July, as efforts stagnated, S&P said the odds of a downgrade within three months had moved up to 50 percent.

The ultimate deal between Obama and Congress ultimately failed S&P’s benchmark. Obama administration officials have been critical of S&P for making what was essentially a political judgment and for failing to conclude that the country was making a strong first step to reducing its deficit.

Dollar Seen Losing Reserve Status

by TwoCentsEditor

Published on: 06/27/2011

Categories: Economics, Financial Markets

Tags: creature from jekyll island, dollar, federal reserve g. edward griffin, IMF, reserve currency, World Bank, Zoellick

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Editor’s Note: Coming to a theater near you…

The US dollar will lose its status as the global reserve currency over the next 25 years, according to a survey of central bank reserve managers who collectively control more than $8,000bn.

More than half the managers, who were polled by UBS, predicted that the dollar would be replaced by a portfolio of currencies within the next 25 years.

That marks a departure from previous years, when the central bank reserve managers have said the dollar would retain its status as the sole reserve currency.

UBS surveyed more than 80 central bank reserve managers, sovereign wealth funds and multilateral institutions with more than $8,000bn in assets at its annual seminar for sovereign institutions last week. The results were not weighted for assets under management.

The results are the latest sign of dissatisfaction with the dollar as a reserve currency, amid concerns over the US government’s inability to rein in spending and the Federal Reserve’s huge expansion of its balance sheet.

“Right now there is great concern out there around the financial trajectory that the US is on,” said Larry Hatheway, chief economist at UBS.

The US currency has slid 5 per cent so far this year, and is trading close to its lowest ever level against a basket of the world’s major currencies.

Holders of large reserves, most notably China, have been diversifying away from the dollar. In the first four months of this year, three quarters of the $200bn expansion in China’s foreign exchange reserves was invested in non-US dollar assets, Standard Chartered estimates.

The prediction of a multipolar currency world replacing the current dollar dominance chimes with the thinking of some leading policymakers.

Robert Zoellick, president of the World Bank, last year proposed a new monetary system involving a number of major global currencies, including the dollar, euro, yen, pound and renminbi.

The system should also make use of gold, Mr Zoellick added. The results of the UBS poll also point to a growing role for bullion, with 6 per cent of reserve managers surveyed saying the biggest change in their reserves over the next decade would be the addition of more gold. In contrast to previous years, none of the managers surveyed was intending to make significant sales of gold in the next decade.

Central banks have bought about 151 tonnes of gold so far this year, led by Russia and Mexico, according to the World Gold Council, and are on track to make their largest annual purchases of bullion since the collapse in 1971 of the Bretton Woods system, which pegged the value of the dollar to gold.

The reserve managers predicted that gold would be the best performing asset class over the next year, citing sovereign defaults as the chief risk to the global economy.

The yellow metal has risen 19.5 per cent in the past year to trade at about $1,500 a troy ounce on Monday, buoyed by the emergence of sovereign debt concerns in the US as well as eurozone debt woes.

Why We’re in This Mess

by TwoCentsEditor

Published on: 06/27/2011

Categories: Current Events, Economics

Tags: alex jones, dollar, Federal Reserve, inflation, inflation tax, international bankers, national inflation association, peter schiff, Ron Paul

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The first shows the declining value of the dollar…. So much for the Fed mandate of price stability..

The Dollar's value: down the drain

The second shows what happens to your debt when you decide to become a consumer nation as opposed to a producer one and pay for it all with borrowed money.

The Cost of Consumerism

Trichet: Signals Flashing Red

by TwoCentsEditor

Published on: 06/23/2011

Categories: Current Events, Economics, Financial Markets

Tags: bailouts, bank failure, banks, dollar, Economics, EU, Euro, stocks

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Editor’s Note: Another bailout anyone???

June 23 (Bloomberg) — European Central Bank President Jean-Claude Trichet said risk signals for financial stability in the euro area are flashing “red” as the debt crisis threatens to infect banks.

“On a personal basis I would say ‘yes, it is red’,” Trichet said late yesterday in Frankfurt after a meeting of the European Systemic Risk Board, referring to the group’s planned “dashboard” to monitor risks. “The message of the board is that” the link between debt problems and banks “is the most serious threat to financial stability in the European Union.”

Trichet, who chairs the ESRB, made the remarks as European leaders meet in Brussels to discuss how to stave off a Greek default, while preparing a second bailout. The EU is trying to avoid a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc. and resulted in European governments setting aside more than $5 trillion to support banks.

The yield difference, or spread, between 10-year German bunds and Greek securities of a similar maturity was at 1,388 basis points today, up from 1,317 at the beginning of the month. Swaps on Greece rose 25 basis points to 2,012, signalling an 82 percent chance of default within five years, according to CMA.

‘Moral Support’

Greek bonds have been pushed lower as authorities bickered over ways to support the nation. The ECB and the German government have clashed over how much investors should contribute to alleviating Greece’s debt load, which reached 143 percent of gross domestic product in 2010. The German government has argued for an extension of the maturities of Greek bonds, with the ECB saying it opposes anything that could be interpreted as a default.

While Greek Prime Minister George Papandreou earlier this week won a vote of confidence, bolstering his new government’s chances of pushing through austerity measures to secure further financial aid, European finance ministers said earlier this week they would hold off on approving a 12 billion-euro ($17 billion) payment to the country promised for July until passage of the plans to cut the budget deficit and sell state assets.

“European leaders will try and convince Greeks and financial markets when they meet in Brussels today and tomorrow that they have a workable plan to help Athens avoid a debt default,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. They’ll use a “mixture of arm-twisting and moral support” to force Greece to adopt further reform.

‘Serious Threat’

Federal Reserve Chairman Ben S. Bernanke downplayed the risk of a Greek default on U.S. banks, telling reporters yesterday that the impact would be “very small.” With “very few exceptions, the money-market mutual funds don’t have much direct exposure to the three peripheral countries which are currently dealing with debt problems,” he said.

The top U.S. prime money-market funds have about half their assets in securities issued by European banks, Fitch Ratings said in a report on June 21. The Bank for International Settlements estimated European lenders held $136.2 billion in loans to Greece at the end of 2010 and almost $2 trillion in Portugal, Ireland, Spain and Italy. Greece, Ireland and Portugal all received external support.

BNP Paribas SA, France’s biggest bank, and rivals Societe Generale SA and Credit Agricole SA may have their credit ratings cut by Moody’s Investors Service because of their Greek investments, the ratings company said on June 15. German banks could also be at risk from contagion, Fitch said last month.

“The most serious threat to financial stability in the EU stems from the interplay between the vulnerabilities of public finances in certain EU member states and the banking system,” Trichet said. There are “potential contagion effects across the union and beyond.”

Basel Meeting

Part of a wider regulatory overhaul, the 65-member ESRB aims to identify and warn of brewing risks in the financial system. Trichet and Bank of England Governor Mervyn King, vice- chairman of the board, highlighted risks in areas including asset-price imbalances and exchange-traded funds.

King is also at the center of a regulatory overhaul in the U.K. and will hold a press conference in London tomorrow on Britain’s Financial Policy Committee. He said the ESRB meeting highlighted “the ability of banks to reduce maturity and, where relevant, currency mismatches in their funding structures and to absorb losses arising out of the ongoing credit cycle.”

The Frankfurt-based body can pass on matters to the heads of European governments if its warnings aren’t heeded. While the body will monitor macro-prudential risks, it may turn its attention to single institutions deemed systemically important.

The ESRB is one of four bodies in Europe’s financial regulation architecture. The others are the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority.

The Basel Committee on Banking Supervision meets in Basel, Switzerland, today to discuss how much extra capital the world’s largest and most systemically important banks will be forced to hold to avert another financial crisis. Global central bank governors are scheduled to meet under the auspices of the BIS in Basel from June 25.

Greece Given over to Violence

by TwoCentsEditor

Published on: 06/15/2011

Categories: Current Events, Economics, Financial Markets, Foreign Exchange Markets

Tags: alex jones, andy sutton, bob chapman, bonds, civil unrest, dollar, Euro, greece, junk bonds, riots

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Police have been firing teargas in an effort to disperse the crowd

Greek police have fired teargas at protesters outside parliament as MPs prepared to debate new austerity measures required for the EU and IMF bail-out package.

Demonstrators who broke off from a strike rally in Athens responded by throwing yoghurt and stones.

Prime Minister George Papandreou faces the risk of a revolt in his Pasok party over the austerity package.

He has proposed a unity government to pass the measures, state TV reports.

He is seeking support for a new austerity programme of 28bn euros (£24.6bn; $40.5bn) in cuts to take effect from 2012 to 2015.

Thousands are taking part in a general strike, the third in Greece this year.

Ports, public transport and banks have been badly disrupted as the main public- and private-sector unions go out on strike.

State-run companies have also joined the walkout, while hospitals are only offering emergency care. However, airports are operating normally after air traffic controllers called off their strike.

A top credit agency has cut Greece’s rating, making it the least credit-worthy nation out of 131 countries it monitors.

The Greek government said the downgrade by Standard & Poor’s – from B to CCC – ignored its efforts to secure funding.

In order for the next tranche of rescue loans to go through, parliament must adopt the new austerity plan by the end of June.

‘Fight the battle’

Police thwarted protesters who were attempting to blockade parliament and stop MPs getting in for the debate.

They sealed off the roads leading to Syntagma Square and created a pathway for deputies.

The Greek demonstrators are calling themselves the “indignants”, linking themselves to Spanish anti-austerity protesters who set up camps in Madrid and Barcelona.

The square is awash with Greek and Spanish flags, as well as banners reading “Resist” and the battle cry from the Spanish civil war, “No pasaran” (they shall not pass), the AFP news agency reports.

One MP defected from Mr Papandreou’s Pasok party on Tuesday, leaving it with only 155 of the chamber’s 300 seats.

“You have to be as cruel as a tiger to vote for these measures. I am not,” George Lianis, a former sports minister, said in a letter to parliament’s speaker announcing his departure from the parliamentary group.

At least one other Pasok MP has threatened to vote against the new programme of cuts and privatisation of state assets.

Another 14 MPs are wavering in their support for the austerity plan, our correspondent says.

Mr Papandreou held talks on Wednesday with Greek President Karolos Papoulias, telling him that “a national effort” was required.

“We are at a historically crucial moment and a time of crucial decisions,” Mr Papandreou said, according to a transcript released by his office.

“In any case, we will move forward with this sense of responsibility and the necessary decisions.”

Possible contagion

Meanwhile, eurozone finance ministers have failed to agree on how to make private creditors contribute to a possible second Greek bail-out.

Ministers meeting in Brussels continued their discussions late into the night on Tuesday on ways of making private bondholders share the cost of a second rescue package without throwing financial markets into turmoil.

As a result of their failure to reach a deal, the cost of insuring Greek debt against default shot to an all-time high.

In a sign of possible contagion from the Greek crisis, credit rating agency Moody’s said it might downgrade the three largest banks in France because of their exposure to Greek debt.

Share prices for BNP Paribas, Credit Agricole and Societe Generale all fell as a result.

France appealed for calm, saying it opposed a Greek restructuring which could entail write-offs for private banks.

“The French position is voluntary – no restructuring, no credit event and in line with the ECB,” government spokesman Francois Baroin told reporters in Paris.

The EU and IMF are demanding the measures in return for the release of another 12bn euros in aid next month which Athens needs to pay off maturing debt.

Forbes Predicts Return to Gold Standard Within 5 Years

by TwoCentsEditor

Published on: 05/11/2011

Categories: Current Events, Economics, Financial Markets

Tags: dollar, gold, gold standard, inflation, money

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A return to the gold standard by the United States within the next five years now seems likely, because that move would help the nation solve a variety of economic, fiscal, and monetary ills, Steve Forbes predicted during an exclusive interview this week with HUMAN EVENTS.

“What seems astonishing today could become conventional wisdom in a short period of time,” Forbes said.

Such a move would help to stabilize the value of the dollar, restore confidence among foreign investors in U.S. government bonds, and discourage reckless federal spending, the media mogul and former presidential candidate said. The United States used gold as the basis for valuing the U.S. dollar successfully for roughly 180 years before President Richard Nixon embarked upon an experiment to end the practice in the 1970s that has contributed to a number of woes that the country is suffering from now, Forbes added.

If the gold standard had been in place in recent years, the value of the U.S. dollar would not have weakened as it has and excessive federal spending would have been curbed, Forbes told HUMAN EVENTS. The constantly changing value of the U.S. dollar leads to marketplace uncertainty and consequently spurs speculation in commodity investing as a hedge against inflation.

The only probable 2012 U.S. presidential candidate who has championed a return to the gold standard so far is Rep. Ron Paul (R.-Tex.). But the idea “makes too much sense” not to gain popularity as the U.S. economy struggles to create jobs, recover from a housing bubble induced by the Federal Reserve’s easy-money policies, stop rising gasoline prices, and restore fiscal responsibility to U.S. government’s budget, Forbes insisted.

With a stable currency, it is “much harder” for governments to borrow excessively, Forbes said. Without lax Federal Reserve System monetary policies that led to the printing of too much money, the housing bubble would not have been nearly as severe, he added.

“When it comes to exchange rates and monetary policy, people often don’t grasp” what is at stake for the economy, Forbes said. By restoring the gold standard, the United States would shift away from “less responsible policies” and toward a stronger dollar and a stronger America, he said. “If the dollar was as good as gold, other countries would want to buy it.”

An encouraging sign for Forbes is that key lawmakers besides Rep. Paul are recognizing that the Fed is straying well beyond its intended role of promoting stable prices and full employment with its monetary policies.

Forbes cited Rep. Paul Ryan (R.-Wis.), who, he believes, understands monetary policy better than most lawmakers and has shown a willingness to ask tough but necessary questions. For example, when Federal Reserve Chairman Ben Bernanke appeared before the House Budget Committee in February, Ryan, who chairs the panel, asked Bernanke bluntly how many jobs the Fed’s quantitative-easing program had helped to create.

Politicians need to “get over” the notion that the Fed can guide the economy with monetary policy. The Fed is like a “bull in a China shop,” Forbes said. “It can’t help but knock things down.”

“People know that something is wrong with the dollar,” Forbes concluded. “You cannot trash your money without repercussions.”

Fed Finally Being Blamed for Inflation

by TwoCentsEditor

Published on: 03/25/2011

Categories: Current Events, Economics, Financial Markets

Tags: bernanke, debt, deflation, dollar, Federal Reserve, fiat currency, fiat money, inflation, prices

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Editor’s Note: Even though this article tried to make a mockery of the issue, it is a somewhat tacit admission of what thinking people have known for a long time: inflation is a monetary event and central banks are in fact responsible for the concomitant loss in purchasing power.

Food riots, deposed Middle Eastern despots and now this? Last week, a Texas man brandishing an assault rifle was involved in a three-hour shoot-out with police and had to be subdued with tear gas after ordering seven Beefy Crunch Burritos at a Taco Bell drive-through and being informed that their price had risen from 99 cents to $1.49.

Late night comedians and serious pundits alike had a field day with the story, opining on issues like fast-food culture, obesity (the seven burritos contain 3,600 calories, double the recommended daily intake) and gun control.

With his petty gripe, the gunman, Ricardo Jones, is no Muhammad al Bouazizi, the self-immolating Tunisian fruit seller who inspired millions across the region to throw off the yoke of tyranny, but 50 per cent is 50 per cent in San’a or San Antonio. Food inflation is a global phenomenon.

Taco Bell may well not be the villain here. It was recently alleged in a class-action lawsuit that only 35 per cent of what the fast-food chain describes as “beef” meets the strict technical definition (meat from a cow). The remaining 65 per cent is claimed to be made from fillers such as potassium lactate, modified corn starch, malto-dextrin and autolyzed yeast extract. Taco Bell has said it vigorously disputes the allegations made about its food – but if the class action claims were proved to be true, it could be seen as an ingenious attempt to hold the line on meat price rises. However, it is not only the price of meat that is rising alas, but also fuel, flour, vegetables and even autolyzed yeast extract.

The finger of blame is increasingly pointing toward central banks and the US Federal Reserve in particular. By printing money through quantitative easing, there are supposedly more dollars, yen and pounds chasing the same number of Beefy Crunch Burritos. Fed chairman Ben Bernanke actually was asked during a speaking engagement last month whether the central bank was culpable for the revolution in Egypt.

“I think it’s entirely unfair to attribute excess demand pressures in emerging markets to US monetary policy because emerging markets have all the tools they need to address excess demand in those countries,” said the clearly annoyed banker.

But an increasingly common view is that, with the very best intentions, he is at fault. Critics regularly cite the words of Milton Friedman, who said that “inflation is always and everywhere a monetary phenomenon”.

The great economist’s words and work are being misinterpreted though. The monetary base has indeed mushroomed but, in the quantity theory of money, it is not a simple increase in the base that causes inflation. It is an excess supply of money, which is not the case – not yet anyway. At the moment, the money shows up as excess reserves on bank balance sheets, for which they receive interest.

If the Fed were to reduce or eliminate what it pays banks to park those reserves at the Fed, or if banks decided to expand balance sheets rapidly, then things would change. A little of this might be welcome but, if the Fed were too slow to put the brakes on a surge in lending out of fear of harming the recovery, serious inflation could result.

QE is not entirely off the hook though. Even if there is actually not more money in the economy chasing assets, the market’s anticipation of future recklessness and the opportunity cost for investors of holding low-yielding cash has increased the appeal of real assets. The Fed is happy to see this when it comes to shares or homes as this creates a benign wealth effect. Commodities are a different matter.

Even so, the price of oil, or of burritos for that matter, corresponds much more closely to supply and demand than, say, a share of Apple, which is not consumed and whose value is in the eye of the beholder. Rising affluence of developing market consumers – the so-called “march of the Chinese meat-eaters” – is the chief culprit. This is exacerbated by distorted currency regimes such as China’s, as Mr Bernanke hinted.

Just don’t shoot the messenger. Or the drive-through employee for that matter.

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