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Thursday, November 11, 2010

Bernanke wants you to pay more for food and gas (good read from Drew Voros)

By Drew Voros
Oaklund Tribune Business Editor
You won't hear politicians promising to fix the economy by making you pay more for food, clothing and gasoline. That campaign wouldn't fly very far, even if it were the correct solution.

But that's exactly what Federal Reserve Chairman Ben Bernanke has set out to do when the Fed announced last week it would employ a $600 billion "quantitative easing" plan.

Don't let that mind-numbing economic term lull you into complacency. There's plenty of pain in store for consumers.

The plan is to have America's central bank buy $75 billion worth of U.S. Treasury bonds every month, which Bernanke says will lower interest rates to help spur corporate and consumer spending. In turn, financial markets react positively to the billions of "easier" dollars being made out of thin air, which also doesn't increase the government's debt.

What Bernanke glosses over is that the real reason behind this move is to devalue the dollar, a controversial move during any economic time.

That creates higher prices for the things you buy the most, which the Fed believes is the formula to ensure steady economic recovery.

In theory, Bernanke envisions tame inflation that forces increased consumer spending.

In practice, with investors fearing a currency war and buying dollar-dominated commodities, the stage is set for inflation that will put a new chill on consumer spending.

The Federal Reserve doesn't have too many tricks left up its sleeve.
Interest rates are already at all-time lows, and there's no political will in Congress for any more stimulus.

Printing money so the Fed can buy U.S. Treasuries is the last rabbit in the economic hat.

However, savvy investors throughout the world see this as an open invitation to speculate on commodities. Debasing the dollar makes commodities, which for the most part are priced in dollars, more expensive to buy. That's why the gold bubble has resumed its record run-up this month, oil prices are making an ascent during the slowest driving season of the year, and crop prices are shooting up quicker than weeds.

Take a look at how commodity prices that affect your pocketbook the most were trading Tuesday, one week after the Fed's plan was announced:
  • Crude oil rose to $87.63 a barrel, the highest price since Oct. 9, 2008, on an intraday basis. Expect higher gas prices.
  • Cotton prices rose by the exchange limit of 5 cents to $1.4711 a pound, the highest level since the fiber began trading 140 years ago. Expect higher clothing prices.
  • Soybean and corn prices jumped to their highest levels in more than two years, and wheat advanced to its highest price since Aug. 12. Those are three of the biggest U.S. crops. Expect higher food prices.
With little to deter speculation on these commodities, short of the Fed abandoning this plan, prices for gas, food and clothing will go up without a doubt.

The plan to extract more from consumers so that corporate revenues rise on the hope hiring will follow has been put into practice.

Now we'll see it if works, or if it puts more people out of work.

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