Page 1 of 2 Bernanke wins a bit of time
By Julian Delasantellis
In the now almost two-and-a-half year tenure of US Federal Reserve Board
chairman Ben Bernanke there have been few events to which he can point to with
pride or satisfaction. Most of his time in office has been spent has been spent
rushing to extinguish the fires at one of the many piles of gasoline soaked
rags left for him to deal with by his smug predecessor, Alan Greenspan.
However, after Tuesday's meeting of the Federal Reserve's interest rate setting
Open Market Committee where there was no change in short-term interest rates,
perhaps the chairman can take a bow for himself, if only in private. The 1st
century Greek
historian Plutarch said that "It is a difficult thing for a man to resist the
natural necessity of mortal passions."
By resisting the intense passions and pressures he was subjected to this spring
to raise interest rates, it now appears that Bernanke made the right call. Good
for him. As for the rest of us in the world economy, the picture looks as bleak
or bleaker than ever.
When last we left Bernanke and his band of merry mirthmaking monetary minstrels
in late June, the boys were in quite the pickle. Once again, they had
disappointed the markets by failing to raise interest rates to deal with the
ever-looming inflationary threat. Back then it seemed that Bernanke's preferred
anti-inflationary monetary policy instrument was his mouth, as he was at that
time in the process of continually making speeches stressing his
anti-inflationary vigilance. (See
Bad times get worse for Ben Asia Times Online, June 10, 2008). Bernanke
continued his open-mouth operations with a stridently worded anti-inflationary
statement, which he apparently hoped the market would accept in place of a rate
hike, after the last Open Market Committee meeting on June 25.
Of course, the reason that Bernanke has been so reluctant to squeeze the rate
hike trigger has been that inflation is not the only predator stalking the US
and world economy these days. Along with rising prices is the threat of
economic contraction and unemployment arising from what is now the second year
of the credit/financial crisis that metastasized last year out of the market
for US subprime mortgages.
Since the nostrum for rising prices, higher interest rates, is the absolute
venom for rising unemployment, and vice versa, one could see why Bernanke might
have felt there were terrible dangers in movement in any direction away from
his comfortable perch of inaction. It was almost as if the capitalist world was
now being faced with the return of a doleful specter from the late '70s even
more terrifying than that era's two-tone platform shoes and rotating disco
balls - the simultaneous experience of both rising inflation and unemployment,
generally called stagflation.
In the compendium of observed phenomena that comprise conventional economic
zoology, stagflation has always been a most queer duck. In the Keynesian
consensus that dominated economic thought in the capitalist world after World
War ll, it was thought to be, like a heat wave during a blizzard - virtually
impossible. The prevailing economic management paradigm of that era, the so
called "Phillips Curve" (named after New Zealand economist A W Phillips)
essentially told policymakers that inflation cured unemployment, and
unemployment did the same for inflation. They just couldn't exist together.
Until the late 1970s. The 1973 oil shock that followed upon the Yom Kippur
Arab-Israel War and the 1979 oil shock that followed upon the Iranian
Revolution drove the price of oil up from around US$3 a barrel before 1973 to
over $30 a barrel by the end of the decade. That fed through to the generalized
price increases that marked that era's high inflation rates; when people
couldn't pay the new, higher prices, consumption lagged, workers got laid off,
and unemployment rose. What seemed at the time to be two simultaneous events,
inflation and unemployment, were, in actuality, just the tail end of the 1970s
high inflation as it broke, and the leading crest of the recession of the early
1980s as it built.
But that wisdom comes only with the foresight of hindsight. At the time, it
seemed that stagflation was a particularly virulent malady, for nothing that
was tried to counter it seemed to work. From Gerald Ford's "Whip Inflation Now"
(WIN) buttons, to Jimmy Carter's "We're in a malaise and I'm in a sweater"
speech, with British coal miners of that era deciding that they were the
legitimate rulers of the nation, and Britain was going to freeze in the dark
until the nation realized it, policymakers were at a loss to restore the
capitalist world's prosperity that seemed so abundant back in the swinging 60s.
Interest rates were raised, raised again still, but the hikes seemingly had no
effect-inflation continued to advance. (Now, we know that the rate hikes were
very definitely having an effect, just not the instantaneous effects that
politicians who had to face the voters in the near future needed to see.)
Eventually, it was US Federal Reserve chairman Paul Volcker raising the Federal
Funds rate to 20% in 1981 that broke inflation, at the cost of a grueling
subsequent recession that drove unemployment to almost 11% in 1981 - the
highest level of the post war era.
However, the conventional wisdom that the economic profession, along with the
one semester economics course dropouts in high positions of elected authority,
learned from the stagflation of 30 years ago was not that it represented a
transitory phenomenon from one state to another, but that it was a particularly
pernicious circumstance that, if not treated early with a mildly painful
regimen of small interest rate hikes, would have to be dealt with later with
excruciating continuing and significant rate hikes.
Early this year through the spring, as crude oil blew past $100 per barrel
towards $150 or more, and as the reported inflation figures in the capitalist
economies ran right past the previously declared comfort zones of their central
banks, calls were made to remember the lessons of the 1970's, and to raise
interest rates a little now so as to not have to raise them a lot more later.
For Bernanke, who had lowered the US Federal Funds target rate a whopping 225
points, from 5.25% to 2%, in less than eight months, the entreaties for higher
interest rates, most notably, from within his own board in the personage of
Dallas Federal Reserve Bank president Richard Fisher, must have been
particularly pointed, for they implicitly charged him with, in his eagerness to
fight the credit crisis, abandoning the more important fight against inflation.
What a difference the six weeks from the last Fed meeting have made, in that it
is during this time we have seen the beginnings of a substantial diminution of
the world inflation threat, caused by, of course, the growing threat of further
economic weakness. In short, just like in the late 1970s, the world just can't
afford to pay such high prices for its commodities.
The poster child for world commodity inflation has, of course, been the surging
cost of crude oil leading to record prices for gasoline and other petroleum
products. From the few pennies that recently have been shaved off gasoline pump
prices, consumers know that something's going on with crude prices, but the
continued stickiness of gasoline prices at these high levels, caused by
refiners and other "downstream" oil business interests using the drop in crude
to fatten their profit margins, is disguising just how far and fast commodity
prices are now falling.
From its high - up near $150 on July 11 - to Tuesday oil has fallen by $30 a
barrel, or about 20%. Gold is down 11% from its high on July 15, over $100 an
ounce. The commodities whose demand is thought to represent future prospects of
a strong world industrial sector are also seeing their prices rolling off the
cliff, with copper down 15% from its highs and aluminum down 10%. Palladium,
once in high demand as the material that jacketed the big catalytic converters
needed to scrub the big pollution from the big engines of the big SUVs that are
now sitting unsold in big automobile dealer parking lots, produced by the
no-longer big US car companies, has hit the commodity price selloff jackpot,
down almost 30% just this month.
Last spring, it seemed like the rising prices of foodstuffs would spread chaos
and turmoil across the developing world, but they're now falling along with the
industrials. Wheat futures prices are down 22% in just the past few weeks,
soybeans 24%, corn, whose demand has recently been driven by America's
ethanol
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