Bernanke takes one more
gamble By Julian Delasantellis
It was in 1978 that Kenny Rogers, the
Dylan Thomas of America's trailer parks, sang the
song "The Gambler", with wisdom equally applicable
to any poker player looking at his cards or any
financial market trader looking at his monitor.
Son, I've made a life out of readin'
peoples faces, And knowin' what their cards
were by the way they held their eyes. So if
you don't mind my sayin', I can see you're out
of aces. For a taste of your whiskey I'll
give you some advice.
So I handed him my
bottle and he drank down my last
swallow. Then he bummed a cigarette and asked
me for a light. And the night got deathly
quiet, and his face lost all
expression. Said, if you're gonna' play the
game, boy, ya gotta learn to play it
right.
You got to know when to hold 'em,
know when to fold 'em, Know when to walk away
and know when to run. You never count your
money when you're sittin' at the
table. There'll be
time enough for countin' when the dealin's
done.
Prior to
Wednesday's dual 25 basis point cuts in the US
Federal Funds Target Rate and the Discount Rate,
the thought in the markets was that Federal
Reserve chairman Ben Bernanke had well learned
this lesson, that he was prepared to "walk away"
from the table. This appears not to be the case.
With much of the world hungry from surging food
prices that very well may have been caused by
Bernanke himself, he surprised the table by
raising the stakes, telling the game that he was
at least willing to play yet one more hand.
For the ninth time since last
August 17, the Bernanke Federal Reserve Bank has
announced an interest rate cut, another twin 25
basis point cut
in both the Federal Funds Target Rate and the
Discount Rate. These now stand at 2% and 2.25%,
down from 5.25% and 6.25% when the cutting
started.
There was little surprise in the
actual cutting move; apparently, Bernanke has now
learned from his predecessor Alan Greenspan the
value of not surprising the markets too much. What
was a surprise was what was in the policy
statement that accompanied the cut, or, more
accurately, what wasn't in it.
Normally,
financial markets, especially stock markets, love
central bank rate cuts, as they both lessen the
attractiveness of alternative, risk-free
investments such as bank certificates of deposit,
and they are generally believed to spur economic
growth, by increasing the general level of money
liquidity in the system.
However, in the
past few weeks, the markets started to wonder if
perhaps they were getting too much of a good
thing.
The Fed's rate cutting has been
particularly fast and frenetic this year. Starting
with big twin emergency 75 basis point cuts in the
wake of the Societe Generale trading scandal on
January 22, the total amount of cutting in 2008
even before Wednesday's move was 2% in the funds
target rate, 2.25% in the discount rate.
All the cutting was in response to, and an
attempt to ameliorate, the generalized economic
weakness spreading out of the financial sector
from the subprime crisis. This, of course, was
also the rationale behind mid-March's
Fed-engineered rescue of the Bear Stearns
brokerage house, so as to not drain even more
liquidity and confidence from out of the battered
financial system. (For an account of the rescue
and its implications, see A Risk Free Revolution
Asia Times Online, April 2.)
Federal
Reserve interest rate and monetary actions
typically become fully felt only after a
substantial time lag, sometimes of up to 18-24
months. Therefore, it is not surprising that most
people have not observed much, or even any, of the
stimulative effects of the rate cuts yet. However,
one place where it seems that the rate cuts are
having an effect is in the sudden astronomical
rise in world commodity prices, and the attendant
intensification of world inflationary pressures
that are logically following from that rise.
The increase in world commodity prices is
nothing particularly new; the CRB commodity price
index bottomed out in late 2001 at 184, before
climbing to over 575 this March. Most observers
attribute the greatest part of this rise to
increased commodity demand from the newly
industrialized "BRIC" economies - Brazil, Russia,
India and China.
However, even with the
BRIC economies continuing to grow at their rapid
and steady pace, it seems that the commodity price
rises this year have been particularly steep.
Looking at the charts, it is hard not to get the
impression that the starting bell for this year's
precipitous commodity price rises was, indeed, the
Fed's first cuts in the middle of January.
Before the January cuts, crude oil was
sitting at the bottom of its three-month range, at
around US$90 a barrel; this week it topped out at
$120, up 33% in three months. Similarly, price
rises in corn, rice, soybeans and many other
commodities accelerated sharply following the
mid-January rate cuts.
The inference here
was obvious. With Bernanke's aggressive and
repeated interest rate cuts, investors seemed to
be more and more concerned that the Fed chairman
was sacrificing the fight against inflation in
order to more aggressively fight the US economic
downturn. Therefore, they were trading their US
dollars from a country not seemingly committed to
maintaining the value of its currency, for hard,
tangible assets such as commodities. The US dollar
declined 11.5% against the euro from January 22 to
April 22.
US consumers may be grumbling
about the food crisis in terms of not being able
to purchase multiple 10 kilogram bags of rice at
their local warehouse club, or maybe having to go
for the single burger instead of the double jumbo
at the fast food drive-through, but in many other
parts of the developing world the food price and
availability crises are matters of life and death.
On this site, Spengler, The Mogambo Guru and Chan
Akya have written on this issue; in Wednesday's
Financial Times, Martin Wolf defined it in these
stark terms.
Of the two crises disturbing the
world economy - financial disarray and soaring
food prices - the latter is the more disturbing.
In many developing countries, the poorest
quartile of consumers spends close to
three-quarters of its income on food.
Inevitably, high prices threaten unrest at best
and mass starvation at worst.
The recent
price spikes apply to almost all significant
food and feedstuffs. Yet these jumps are
themselves part of a wider range of commodity
price rises. Powerful forces are linking prices
of energy, industrial raw materials and
foodstuffs. Those forces include rapid economic
growth in the emerging world, strains on world
energy supplies, the weakness of the US dollar
and global inflationary pressures.
Yet
the food element of this story carries its own
significance. As HSBC points out in a recent
analysis, with rice and wheat prices spiking,
riots on the streets of the Philippines, Egypt
and Haiti and moves by India, Vietnam, Cambodia
and China to restrict rice exports, food is
suddenly an even hotter issue than
normal.
As I've said before,
traditionally, the Federal Reserve Board likes to
avoid the publicity and notoriety that commonly
accrues to elected policy makers. You might have
thought that the absolute last thing they would
want to see is blame falling on their shoulders
for the burning to the ground of every US Embassy,
every franchise of a familiar American brand, from
Southern Africa to Southeast Asia.
Therefore, as this week's two-day meeting
of the board approached, financial market
observers looked for a change in the Fed's
emphasis, maybe even its direction. There would be
no more whopping 50 or 75 basis point at a time
cuts; maybe there should be no cut at all, maybe
even a rate rise.
Bill Gross of Pacific
Investment Management, PIMCO, the grand doyenne
(some would say the prima donna) of the American
bond markets, on the day before the Fed decision
advocated for no cut. "Lower Fed Funds? They
would, in PIMCO's opinion, likely do more damage
than good from this point forward. Foreign and
domestic investors are being fleeced with negative
real interest rates, and the weak dollar,
stratospheric commodity prices and steadily rising
import inflation are the result."
A
consensus developed in the market that there would
be one last 25 point cut, but, accompanying the
rate move would be a fairly clear and concise
statement proclaiming that, due to the
inflationary pressures now boiling over on the
streets of the world, this would be the last cut
for a good long while.
Nope. That they
didn't get.
There is some dispute among
the professional Fed watching community as to what
the Fed actually meant, even what it actually
said. Joseph Brusueles of the economic consulting
firm IDEAglobal says that, indeed, the Fed did
express its concern about the seriousness of the
world inflation problem, but in a "silent, but
lucid manner", with a statement that "strongly
implies that the Fed will be on pause for some
time".
In other words, they didn't say it.
Looking at the actual statement, we see it opens
not with concern about inflation, but with
continuing worries about weakening economic
growth.
Recent information indicates that
economic activity remains weak. Household and
business spending has been subdued and labor
markets have softened further. Financial markets
remain under considerable stress, and tight
credit conditions and the deepening housing
contraction are likely to weigh on economic
growth over the next few
quarters.
Following on that, their
concern about inflation seems, well, less than
overwhelming.
Although readings on core inflation
have improved somewhat, energy and other
commodity prices have increased, and some
indicators of inflation expectations have risen
in recent months. The committee expects
inflation to moderate in coming quarters,
reflecting a projected leveling-out of energy
and other commodity prices and an easing of
pressures on resource utilization.
It's not quite as if Bernanke is
doing a Marie Antoinette and telling the starving
peasants of the less-developed world to eat cake;
then again, if the Chicago commodity exchanges
start to offer cake futures as an inflation hedge,
you'll find lots of worried investors in line in
the Windy City waiting to buy.
Over the
past few weeks, much of the financial world,
especially the US equity markets, seems to have
become victims of a particularly bizarre mass
delusion, namely that the credit crisis is just
about over, that the economy is poised for blast
off, that the Fed recognizes that inflation is now
far more serious a problem than this recession and
its subsequent unemployment. The Fed's
demonstration that its primary concern is still
the slowdown, and its relegation of inflation to
secondary importance, was a bracingly cold bath of
disappointment to these fantasies, and the markets
reacted accordingly.
The Dow Jones
Industrial Average, up 190 points shortly after
the announcement, sold off sharply as the full
implications of the Fed move and statement sank
in; the Dow and other averages closed down for the
day. Commodity markets, including crude oil,
closed for the day's trading shortly after the
announcement, but they were rallying into the
close, and the rallies continued in after-hours
trading. In just the hour after the announcement,
the euro resumed its rally against the US dollar,
rising a full cent, from 1.5535 to 1.5635.
I am astounded at the hand that Bernanke
is playing here, the risk he is taking. Much like
in poker, he seems to be going "all in" with this
bet, gambling that his seeming lack of concern
about the inflation threat will not lead to a
crushing inflationary spiral in the US, and
riotous social pandemonium and chaos in those
countries where both bellies and the street are
rumbling with hunger.
Kenny Rogers'
Gambler observed that "the best that you can hope
for is to die in your sleep". Considering the
alternatives if this gamble goes badly, if the
starving street calls Bernanke's bluff, maybe the
Gambler is right.
Julian
Delasantellis is a management consultant,
private investor and educator in international
business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
(Copyright 2008 Asia Times Online Ltd. All
rights reserved. Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
