Central Banks, Monetary Policy and Inflation Part I

Something wonderful from Gary Dorsch AKA Sir Charts-a-Lot: here are some snipets.

Central bankers point the finger of blame for soaring commodity prices on China's juggernaut economy, which has expanded at breakneck speed of 10% for each of the past three years.

Central bankers stare at the explosive CRB rally from the sidelines with a sense of indifference or stone faced silence, though sharply higher commodity prices are telegraphing higher producer price inflation.

Fortunately for commodity bulls, Bernanke doesn't believe there is a link between a higher CRB index and higher producer price inflation.

On February 5th, 2004, Bernanke said, "rising commodity prices are a variable of growth rather than inflation."

Then on May 24, 2005 Bernanke played down worries about higher energy and commodity prices. "Much of the recent price gains in energy and commodities reflect the rapid growth of the Chinese economy. Chinese authorities are now trying to slow that growth, and should help check the growth of commodity prices," he said.

Bernanke has also rejected opinions that the recent rise in oil prices is largely a symptom of super easy central bank monetary policies. "The consensus that emerges from this literature is that the relationship between commodity price movements and monetary policy is tenuous and unreliable at best. Moreover, recent experience doesn't support the notion that monetary policy had a substantial effect on the oil price rise," he said.

Then on October 25, 2005, the day after his nomination to lead the Federal Reserve, Bernanke was asked again about soaring commodity prices and their impact on the inflation outlook. "The evidence seems to be that it is primarily in energy and some raw materials and has not fed into broader inflation measures or expectations. My anticipation is that's the way it's going to stay."

(Seems like Ben is living in a boat floating on a river called Da Nile (read DENIAL). Oh boy, its going to be a hell of a rollercoaster ride with Helicopter Ben).

The Greenspan Fed produced a sizeable counter trend rally for the US dollar in 2005, pushing the greenback from 102-yen to as high as 121.50-yen, and knocking the Euro from as high as $1.3450 to a low of $1.1650.

However, the Fed efforts to control commodity inflation were completely undermined by the super easy money policies of the Bank of Japan and the European Central Bank. More to come in Central Banks, Monetary Policy and Inflation Part II.

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