The Great Inflation Debate

The Great Inflation Debate

Also, refer to How Inflation affects bonds and equity yields and 2 New-Style Candidates Hit Old Notes on Economy.

We live in one of most interesting time to observe how economy behaves in post-globalization era. It is worth noting, however, that many policies and phenomenon contradicts with themselves. If anything in this era can be trusted, the fact that "nothing is as it seems" is one.

For example, if a Minimal State policy is to be implemented, then Fed as an organization should be made obsolete. Also, to create regional conflict by attacking and occupying middle east countries, and as a result, to distort the long term oil price.... all those do not really fit into an image of Minimal State, unless my dictionary is inaccurate.

On the other hand, what's really stopping Federal Reserve to consider oil and food prices as part of CPI? The fear that consumer would panic? Or the fear that Wall Street would crumble to dust? By turning a blind eye on oil and food prices, regardless of intent, Federal Reserve is ACTUALLY encouraging investors with surviving capital to flood into commodity market because it seems to be the safest place to be by now. The fact is: by ignoring oil/food prices, Federal Reserve is actually helping to raise REAL inflation.

But Bernanke fears liquidity crisis above everything else. After announcing that he will not cut rate any further, he did nothing to raise it either. Therefore, I think that it should be safe to draw a conclusion from his behavior. The situation in major banks is REALLY REALLY REALLY bad, by astronomic measure. Consumers, while still complaining, are actually surviving this crisis (so far). Some banks, OTOH, may not survive it if there is any lack of liquidity. (From what I know, most major corporation actually still hold significant amount of cash; so banks will be most hurt if the rate goes up significantly).

If I were Bernanke, I would capitalize on this opportunity. I would tell banks to earn back in commodity market what they have lost previously in securities. I would let the price of commodity BOIL until every investor on this planet holds significant stake on oil and food. And then I will, on signal, raise the rate significantly, strengthening the Dollar and breaking the morale of commodity market. Did I miss something?