Here is one thing strange for me in the very beginning of the article:
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I****t All Started With Jackson Hole….
This run-up in oil prices started with Fed Chairman Bernanke`s Jackson Hole speech where the big banks realized they were going to get a bunch more juice in the form of POMO operations by the Federal Reserve to play around in markets with.
And what did the large financial institutions do with this newly created juice? Instead of allocating the almost zero percent money they are all borrowing to productive activities such as lending loans to small businesses which will create jobs and stimulate the economy, the big banks have decided that since the fed is electronically printing money and providing extra liquidity/juice for financial markets that this is inflationary and devalues the dollar.
All Fed Juices Lead to Commodities
And just to make things worse, the big banks have decided to take their cheap capital they borrow at basically zero percent , and invest into commodities, i.e., agricultural futures like Wheat, Corn, and Soybeans, energy futures like Oil and Gasoline (Fig. 2), and industrial and precious metals like Copper, Gold and Silver. [..]
The unique aspect is that loose monetary policy isn`t problematic at face value when you are trying to stimulate growth, it is what the Big Banks are utilizing this cheap capital for that becomes problematic from an inflation standpoint. The very problem that the Banks are worried about in regards to inflation, they are in fact responsible for creating through self-fulfilling investment practices with regard to this cheap capital at their disposal.
Long Commodities, Short Dollar - Adding Inflation
But it gets worse because at the same time they also short the US Dollar, and going long the commodity currencies like the Canadian and Australian Dollar, which further exacerbates the slide in the US Dollar (Fig. 3), reinforcing the entire trade that they need to buy more commodities as an inflation hedge, further juicing up commodities like oil and gasoline.
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It seems to me that author doesn’t think that QE is inflationary and that banks’ speculation with newly created money is the main culprit for rising future commodity prices and falling dollar index but not QE itself. Could you comment on this issue and explain me what I leave out?
So what is the cause and what is the effect? As banks think QE is inflationary (and it is) they hedge against inflation investing in commodities and causing price to rise. Or investors respond properly to QE at first and banks just follow suit?
All I meant to say was that however much these banks are involved in government and have influence on Fed policies then they are at least partially responsible for the inflation that is occurring.
It’s in the best interests of any society that its commercial organizations looks for as much profits as possible, and that’s what these banks are doing. I’d be very concerned if they were allocating resources in order to “help society”, not to increase their profits.
Also, banks (except the FED) can’t create inflation.
That’s not really the point.
It’s not that these banks are doing something illegal or shady, even if they are actually influencing the FED they are following to a t the beloved keynesian model that everybody but Austrians love. Even if we had only the most honest mainstream economists working at the FED this ridiculous money printing would have happened anyway.
The real question should be: Why are the FED allowed to print money? It doesn’t matter if the FED are in bed with the banks or not, money printing will always lead to inflation and malinvestments, period.
So I think that we should not accept the premise of this article “banks aren’t being socially responsible”, what we have to do is to point out that even if the banks were lending money for cheap in order to help society these would result mostly in malinvestments and would hurt the economy anyway, and that the only way to avoid inflation is having a sound monetary policy.
Phaedros, Frederique Bastiao, thank you for replying.
Precisely. The fact that author blamed banks for hedging against inflation, which, according to his words, caused inflation really embarassed me as these actions seem to be the only reasonalble ones amid rising prices.
Just to add to the sound things everyone has said here already.
About what is the cause and what is the effect.
The QE, meaning the increase in the money supply, is the old definition of inflation. It’s inevitable effect, sooner or later, is raising prices somewhere.
Credit Peter Schiff with this analogy that nails it: Imagine an auction where the most anyone has in his wallet is $100. Obviously the highest possible price paid for something is $100. Now imagne an auction where everyoone, or even someone, has $10,000 in their wallet. What will be the higest bid now?
This time the banks got the money. They have $10,000 in their wallets and everyone else has $100. What’s going to happen? And who is “to blame”, the one who gave them the money, or them for spending it intelligently?