ECB president Jean-Claude Trichet's rate retreat on commodity spike … The European Central Bank (ECB) has taken a strategic gamble that the current surge in food and commodity prices is not a repeat of the inflation virus of the 1970s and will subside without the need for a monetary squeeze. Jean-Claude Trichet said the jump in eurozone inflation to 2.4pc is a 'short-term' effect of rising energy and commodity costs …Yet is a risky move at a time when a powerful new cycle of global growth may be under way and the whole nexus of commodities is on fire. March contracts for Brent crude oil jumped to a two-year high of $103 a barrel on Thursday, while copper broke through $10,000 a tonne and cotton reached the highest price since the US Confederacy halted exports during the Civil War in the 1860s. The UN's Food and Agriculture Organization (FAO) said its index of global food prices had hit a fresh record in January, while Goldman Sachs's farm index has risen 90pc since June. – UK Telegraph
Dominant Social Theme: We are acting responsibly. Sure it may result in hyperinflation, but it's not our fault.
Free-Market Analysis: The decision of both Ben Bernanke and Jean-Claude Trichet (left) to ignore rising commodity prices by keeping interest rates low in the Eurozone, may mark the final decisive failure in the latest disastrous central banking cycle. If money velocity continues to rise, one might fairly accuse top bankers of, in a sense, purposefully destabilizing the system. Such actions verge on the reckless. Trichet is likely risking severe price inflation and perhaps hyperinflation.
Central banks have pumped something like US$20 to US$50 TRILLION into the world's economy to try to reinflate economies that collapsed in 2008. As this currency begins, finally, to circulate, price inflation must result, unless such money is quickly removed. Central bankers have continuously claimed that excess currency can be removed from the larger economy before it does its inflationary damage, but Trichet's decision shows how difficult it is to actually withdraw currency once it is "printed." Central banking, after all, is an art not a science.
Each powerful central banker – Trichet or America's Ben Bernanke – is empowered to make their own decisions as to when the time comes to act and to remove currency from the system by various purchasing strategies. But the trouble with such strategies, as we've pointed out many times in the past, is that there is no mathematical equation that actually makes it clear when to act. This is compounded by the issue of how much money is too much.
There is no scientific way of figuring out how much money an economy needs. There is no scientific way to figure out when to drain money from the system. In fact, by the time price inflation becomes a visible problem it is probably too late. This is why it is so important to use free-market money, as Austrian, free-market economists argue.
In, say, a free-banking arrangement, when too much gold and silver are circulating – lowering the price of money – then hoarding and mine shut-downs take money out of circulation. Once prices rise, people begin to dis-hoard and money circulates once again. Central banking short-circuits market signals. It removes money from free-market influences and set prices by price-fixing and guesswork. The eventual results are always disastrous.
Despite evidence price-inflation is picking up, the world's two most powerful central bankers – Trichet and Bernanke – appear to be in denial. According to the Financial Times, Ben Bernanke has issued a strong statement denying that the Federal Reserve's hyper-easy monetary policy has had anything to do with rising food prices around the world. FT quotes him as saying (enigmatically in our opinion), "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."
According to FT, Bernanke said recently that rising food prices in the emerging world reflected the growing wealth of their populations and, in some countries, a failure to tackle inflation. According to the San Francisco Chronicle, Bernanke "won't pull back the central bank's easy money policies any time soon, even as the government is expected to report positive job growth Friday. ‘Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established,' he said. Though the economic recovery ‘appears to have strengthened in recent months,' that growth isn't happening fast enough."
Bernanke's stubborn and arrogant attitude in the face of rising prices worldwide for food and commodities, is buttressed by his European counterpart's. According to the UK Telegraph, Trichet [has] carried out a "deft pirouette … Markets had priced in two rates this year after his comments in January, so he is now trying to put those expectations back in the box … "
What is Trichet most worried about? Apparently, broad deposit outflows from the Irish banking system as a result of the Irish banking crisis. There is a semi-perpetual run on Irish banking institutions that indicates a profound uneasiness with EU decisions; raising rates (reducing liquidity) would only add to Irish woes. "The ECB decision to ‘look through' the commodity spike brings the bank closer into line with the Bank of England and the US Federal Reserve, which has kept its focus on core inflation measures that strip out food and energy," the Telegraph reports.
Yet at the same time that the world's two most powerful central bankers are making a decision to ignore price inflation in favor of economic growth and job creation, World Bank president Robert Zoellick once more has urged "action on rising food prices," according to Reuters. "The world faces a broader trend of increasing food and commodity prices and more countries should wake up to the need to curb price volatility."
In a phone interview from Berlin, Zoellick called on G20 global leaders to "put food first" to tackle the surge in prices and increased volatility threatening the poor and driving up inflation in developing countries, mainly in Asia, according to Reuters. "We are going to be facing a broader trend of increasing commodity prices, including food commodity prices. This can put pressure but also create opportunities."
The Middle East and Africa are being ripped by food riots. But we can see that Western central banking heads are denying that there is a problem. These denials are necessary because Western countries are still too fragile economically to raise interest rates and otherwise reduce liquidity. If tightening were to be accomplished, the chances are that employment would be reduced, along with any nascent recovery.
Western central bankers are obviously worried that if Western economies fall back into severe recession, that civil unrest similar to that of the Middle East's will be the result. Despite overwhelming evidence that currency is now beginning to circulate and that the velocity of money is starting to approach dangerous levels, these central bankers will issue what are essentially political statements in order to avoid removing money from overheating economies. Ordinarily this would be bad news, but given the amount of extra money in the system, central bankers are playing a most dangerous and hyperinflationary game.
Price inflation is a funny thing. Once it begins, it reinforces itself. Money velocity moves faster and faster as people buy today to avoid depreciating currency tomorrow. Price inflation has a real reason for occurring – an expansive and circulating monetary base – and also psychological reasons for worsening fairly quickly unless central bankers take action. Of course, history shows it is fairly impossible for central bankers to "get it right."
There are all sorts of reasons not to act on price-inflation until well after disaster has begun to strike. Hyperinflation, when prices climb dramatically on almost daily basis, is an utter disaster in any fiat money economy. It ruins savers and makes investing and industrial expansion almost impossible. In this case, the money-printing damage has been so egregious and the danger is so evident that it almost begins to seem as if the West's top bankers are intending to destabilize their respective economies. The question then becomes, "why?"
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