The Food Crisis is a Dollar Crisis
By Dan Amoss
At this week’s hearing on Capitol Hill, Fed Chairman Ben Bernanke demonstrated a lack of understanding about what causes inflation. His comments reflected a belief that GDP growth causes inflation.
But true economic growth is production-driven, and adds to the supply of goods and services in the economy. True economic growth is not inflationary. Rather, inflation is driven by runaway government deficits and bloated central bank balance sheets. And right now, we have plenty of both. So we have every reason to expect the CPI, even with all of its window-dressing shenanigans, to soar past 2% in short order.
I’m surprised at how complacent the stock market remains in the face of obvious pressure building on the CPI. If the Fed doesn’t react to a rising CPI by tightening policy, Treasury yields will keep soaring, and inflationary psychology will take root among most producers. If the Fed does react by ending QE and raising short-term rates, it doesn’t require much imagination to guess what would happen to a stock market that’s running entirely on fuel from the Fed. Either of these potential scenarios is bad for stocks. The only scenario that argues for further rallies in stocks is if – miraculously – even with unprecedented money printing and deficits worldwide, the CPI doesn’t continue rising.
A rising CPI will give more ammunition to the growing chorus of Fed critics in Congress. At this week’s hearing, when questioned about the building pressure on consumer prices, Bernanke answered that it would be easy to stop this trend by reversing his policies. But you know he’s terrified at the prospect of tightening. He’s an academic with his head in the sand.
When asked about the impact of QE2 on global food prices, Bernanke responded that the destabilizing spikes are due to weather and rapid growth in demand for grains in emerging markets. What a lame excuse! As an admirer of Milton Friedman, he must know that “inflation is always and everywhere a monetary phenomenon.” Inflation isn’t a “weather phenomenon.”