THE BOJ ANSWERS THE TRILLION DOLLAR QUESTION: WHAT IS CAUSING THE COMMODITY RALLY?

If you’ve been looking for an honest assessment of the recent commodity rally look no further than this bit of research by the BOJ.  They provide a broad overview of the factors that are currently impacting commodity prices and conclude with a practical and fact based argument – global central banks, the financialization of commodity markets and supply/demand mechanics are all working in tandem to cause a perfect storm in commodity prices. They write:

“While the strong increase in commodity prices has been driven by global economic growth propelled by emerging economies, speculative investment flows into commodity markets have amplified the intensity of the price surge. The dynamics of global commodity prices has been changing as well, in accordance with the growing presence of financial investors in commodity markets. The entry of new financial investors has paved the way for the “financialization of commodities”. Consequently, global commodity markets have become more sensitive to portfolio rebalancing by financial investors, which has made commodity markets more correlated with other asset markets, including major equity markets. Furthermore, globally accommodative monetary conditions have played an important role in the surge in commodity prices, both by stimulating physical demand for commodities and driving more investment flows into financialized commodity markets.”

Unlike the SF Fed, which just yesterday absolved the Fed of any impact on commodity prices (in fact said QE2 was exerting downward pressure on commodity prices), the BOJ performs multidimensional & unbiased research that finds the Fed and global central banks are having a dramatic impact on commodity prices.  Of course, they’re not entirely to blame, but these unbiased findings put a very serious hole in the persistent Fed talk that attempts to distance them from the commodity price increases.  In my opinion, this is the most precise and accurate conclusion I have seen with regards to this subject.


rev11e02

Source: BOJ

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • http://www.pragcap.com Cullen Roche

    Just read this again and had to say “bravo BOJ”. I wish our own central bank would publish such excellent, fact based and thorough research.

  • Anonymous

    A very good one, thanks. I always supported this thesis.

    InvestorX

  • http://www.pragcap.com Cullen Roche

    This should be required reading for every Fed employee. Those in the SF Fed should be locked in a room with this paper for 24 hours.

  • http://www.3spoken.co.uk Neil Wilson

    Strikes me that it is just a bubble caused by the pension funds investing in the commodity markets (why are they there!) and an increase in the number and types of derivatives.

    Now we have steady momentum and we’re off on another fun ride to a commodity crash.

    I wonder what will happen once pension funds are wiped out in the coming commodity crash.

  • Anonymous

    Haha, this would be funny – a dark room with no windows and a candle or two…

  • boatman

    from this, the coming slump in equities,commodities and a US election guarrantees QE3

    hendry on china(no, they don’t fund our govmint):

    http://historysquared.com/2011/04/01/hugh-hendrychina-no-longer-there-to-bail-out-world/

  • B Ferro

    Probably too busy with Spankwire like their SEC counter-parts…

  • http://www.pfxiforex.net/ Marc

    Well although this research give a fact base to what smart investors have know for a long time I would still give more weight to speculative driven markets. The indirect way that the FED and central banks are providing this shot of commodity adrenaline in the fact they are allowing the banks to borrow money at the discount rate of nearly 0% or free money. More free even than it was in 2006. These guys are looking for returns ok. That is what they do. They lend cheap money to make money. Do they trust their mortgage lending models right now that failed them so miserably in 2007. Not bloody likely and nor do they trust the type of customer they are now dealing with to apply for a mortgage and won’t until unemployment starts to decrease dramatically and hiring increases. Even a sound candidate cannot be relied upon to keep his job in this current environment of uncertainty. So where do you go for returns? Well you invest in tangible assets when money is being debased. The difference between them and you is they control billions. Three to four billion barrels of oil are traded daily while the world consumes about 86-87 million barrels per day. Think there is just a little speculation going on? The CRB still has not broken its 2007 high and until it does we can’t look at this as being a true bull market YET! However I am not talking about inflationary pressures so please do not confuse the two.

  • quark

    Historically the market rationalization for the existence of speculators and day traders was to provide liquidity for those who utilized the markets for the long term formation of capital and the hedging physical product prior to being placed into the production cycle.

    In today’s markets speculators and to a lesser degree day traders function seems to have morphed into simply a catalyst for perverse and unproductive allocation of both financial and physical resources.

    Yet another example of why our current capitalistic structure must be changed.

  • clark

    japan needs the money they have in us treasuries for reconstruction;mark my words,the G7 interviened in money markets to prop up yen and killed forex traders,they will make back door deal with already broke japan not to sell UST for a big loan of some sort to keep the ponzi going

  • ReturnFreeRisk

    Who cares about the BOJ? They have a two decade record of ineffectual policies. While Bernanke has saved the world with QE(n). He is rewriting the rules of economics. Look at stock prices. No one is going to believe BOJ. But they will believe Bernanke. Sad but true.

  • http://www.pragcap.com Cullen Roche

    I think you’re wrong. I posted BOJ work in August that showed QE2 would have little to no real economic impact. They’re looking exactly right on that.

  • Scott Fullwiler

    Cullen,

    Can you link to that August BOJ piece you did? Thanks.

  • http://www.pragcap.com Cullen Roche
  • Geezer

    Would it not be refreshing if the WALL STREET JOURNAL had the balls to be as objective in its editorial page. Forget the columnists – they are just talking heads!

  • spek

    Thanks for the link. Mr. Hendry is always worth read.

    Mr. Jim Rogers recently interviewed>>>

    http://bit.ly/dRARXd

  • Jason

    Multiple rounds of QE and the idea of to big to fail is infinitely more dangerous than any terrorist threats the nation faces.

  • AWF

    The the BOJ has this right–Good Stuff

    now if they could come up with creditable analysis on radiation from Fuki–and the PACIFIC OCEAN—OMG–they are leaving that to the SF FED researchers

  • Dan

    Don’t forget the hair coats…

  • http://macronomy.blogspot.com Martin

    Thanks Cullen for that very interesting read.

    Thank you Ben Bernanke for, you are indeed, a true follower of Alan Greenspan. A creation of yet another bubble…Or maybe it is the intention of the FED to engineer social unrest and revolutions all around the world? The highest price wheat rose to in 1789 was on the 13th of July, one day before Bastille day. I know, this time is different…

    And thanks to you, the Too Big To Fail have now become Too Big To Bail, as well as big speculators in commodities.

    From SNAFU to FUBAR.

  • B Ferro

    Dude, I love ya, but you are respectfully out of your mind on that. Equities are up massively and have put in one of the five greatest “non bear-market bottom” rallies ever in the past six months. Consumers are feeling that love all over and spending like wild again on cars, electronics, high end fashion (JWN, SKS, LULU) and everything else under the sun, including ultra-expensive organic groceries at places like WFMI. The economic virtuous cycle he targeted is in over-drive mode. It might be for 5% of the population, but who cares, they represent 40% of consumer spending…Retrunriskfree is spot on, Bernank has totally re-written economics over the past year…

  • http://www.pragcap.com Cullen Roche

    Boy, you’re really chugging the kool-aid now. I am not denying that we are in an economic recovery. But I am skeptical of the contribution that QE2 is having. Of course, its impact on equities and nominal wealth is far more impactful than it is on the real economy.

    I know you’re long (and so am I), but you don’t really believe that nominal wealth creation leads to real economic growth, do you? If that were the case equity bubbles wouldn’t occur. They would be virtuous cycles of never ending wealth creation….Real wealth is supposed to lead nominal wealth, but the Fed is obsessed with trying to rework the laws of economics by putting the cart in front of the horse. You’ve fallen for the classic Greenspan economics. I just hope that you’ll be smart enough to time the market before it ends the same way Greenspan’s great remodeling always did….

  • B Ferro

    No kool-aid drinking here. However, I do not doubt for a second that the reacceleration of “recovery” we’ve seen over the past six months would have either 1) not existed or 2) not have been as swift were it not for QE2.

    Also, I am not long. I pointed that out about 10 days ago here and noted I had fully hedge out my long position from 1250 around 1300. Plan to pull that hedge off past 1343.

    I’m not sure that real wealth leads nominal wealth insofar as the market is a foward looking discounting machine.

    What we likely disagree on is probably nothing but a timing related matter – I, and I’m sure you, don’t doubt for a second that the “virtuous cycle” Bernanke created over the past six months is likely unsustainable and also carries with it intermediate to long-term deleterious impacts.

    However, I do think it is tenuous to charge that in in the most recent time period, it has been a slam-dunk success. Remember, we were talking Great Depression v2.0 in July.

  • http://www.pragcap.com Cullen Roche

    The evidence doesn’t match your comments. ISM was 56.3 in August. Global PMI’s were all solidly positive that month. There was obviously no impact from QE2 in that data as it was released just a few days after the Jackson Hole speech. Subsequent data was all positive with claims cratering in the ensuing weeks and generally robust economic data. Real GDP peaked in Q2 2010 (when QE2 was initiated) and its set to moderate to 1.5%-2% or so in Q1 2011. I don’t see how anyone can say that the economy is accelerating under QE2? There was never really a dramatic slowdown in 2010 anyhow. PMI’s dropped to 55 (still expansionary) and GDP remained robust at 3%+. Overall, the rate of expansion in real GDP has fallen under QE2!!!!. Where was this great economic slowdown that occurred in 2010? Bernanke panicked over a 500K print on claims and the Euro crisis. And he initiated this silly policy that is doing nothing. Now he’s caused massive commodity inflation while doing little to nothing to bolster the private sector.

    I’ve never denied that QE2 could bolster equity prices. But where is the evidence that QE2 is helping the real economy?

  • Gerald P

    You are right on the mark.

  • http://minyanville.com Keith Jurow

    Cullen,

    There must be others besides myself who have been reading about Chinese speculators using copper purchased from abroad as collateral for speculation in their real estate market. Or what about Chinese farmers hoarding cotton they grow in their homes in anticipation of higher prices.

    Does anyone really believe that the soaring prices of almost all commodities has anything to do with real supply and demand? As John Tamny, editor of Real Clear Markets has told us over and over again, money is fungible and reserves injected into the banking system by that scoundrel Bernanke will find its way into speculative activites. Just check out the Fed’s H-8 releases to see the soaring amount of large bank money finding its way into their trading desks.

  • http://www.pragcap.com Cullen Roche

    I don’t see how anyone can reject the notion that the Fed is causing rampant speculation and price surges in particular markets….

  • Mike

    Falling unemployment, industrial production is growing, the index of services also increased, rising exports etc. It is not possible that You expect China’s growth rate. GDP is growing about 3%, which means whic is close to potential growth rates. you might ask people in Europe about the growth?

    Best regards!

  • wanwer

    OK so how do I hedge against commodity inflation in a one unit restaurant that spends about $30k on food a week. Call options on DBC? I was netting about $20k/month last year. This year breaking even. All due to food cost price increases and I can’t raise prices I charge customers. It’s a buffet and I can’t control portions. Curious to see if anyone here has some creative ideas the would work (using the financial markets). Thanks.

  • Warf

    Keith is a collusion going on between the world central banks? I think so but can’t find a source.. Any ideas

  • what are you forgetting

    The point most of you are missing is,commodties are real, paper money is becoming worthless as we’ll see in 2-3 years from now.Couple that with infation and people will want something real to hold onto since gold and silver will be hard to come by.

  • Oz

    Clearly Bernanke and QE2 have worked really well…
    …in convincing the layperson that they remain in control. This has prompted people to be more optimistic, spend a bit of their savings, hire a new employee etc. That has been the effect of QE2 on the real economy.

    Of course, if you believe the FED has everything under control, you are a bigger fool than them…

  • http://www.pragcap.com Cullen Roche

    Isnt it great? The fed is trying to get us all to take on more debt or spend money that we havent really made via the stock market. What a plan!!!!

  • Mediocritas

    Great piece from BoJ.

    Now introduce a hefty fee on all futures contracts, to be reimbursed only on taking physical delivery. Watch the speculation disappear in the blink of an eye without effecting real traders.

  • http://www.marketspath.com/ Mpath

    Chugging the Kool-Aide? I think dropping hits of acid is a better statement. I could of swore I was reading Cramer or Joe Kernan from cnbc.

    “I’m not sure that real wealth leads nominal wealth insofar as the market is a foward looking discounting machine.”

    The market WAS a forward looking discount machine(FOR THE ECONOMY). Not anymore and Ben has told all of us that!! Our current stock market is now a forward looking discount machine until the next economic data piece is released. Have you ever wondered for 1 single second why bad is good and good is bad?

    The stock market is now forward looking 60 days out..period!! Any good news means Ben may have to stop his failed qe experiment and we sell off. Any bad news, he may have a leg to stand on to continue his qe experiment and the market’s rally.

    So if you are referring to the stock market being forward looking discount machine as to whether Ben will be able to throw his peeps more money with another round of qe..yes you are correct. If you are referring to the stock market being a forward looking discount machine for the economy..I think you should wash down that acid with some kool-aid

    If the Fed stops qe like they should or forced to..your illusion of the “great recovery” will quickly turn back to Great depression 2-like July 2010..only 1 year later.

    The only thing qe2 did was buy Ben 1 year and add 100 points to the spx from the previous highs. I guess that is worth 1 trillion bucks. Now that Ben has climbed up this cliff try to get away from the bears-he has to figure out how to get down..as every commodity has followed him up there.

    Unfortunately for everyone riding out the last 60 days, Ben may be forced to start down that cliff a lot sooner than many anticipated..but he will NOT let anyone know.

  • smileawey

    if the billions of idle cash that sat on the sidelines at 0% interest had been in 5% FDIC bank savings accounts, the banks would not have needed to be bailed out, the savers would have had more money to spend, the economy would have jumped started itself from the extra interest produced cash generated and spent, there wouldn’t have been a credit crisis, there would be no inflation or dollar devaluation in progress, there would be less commodity speculation, less federal tax forthcoming for the next decade. The banks also would not have been so hungry for income to hand out a mortgage to anyone able to physically enter the bank to sign. For over two decades this low or no interest driven fiasco has proven itself detrimental. Fically responsible people freely spend what is considered extra or easy cash, never the principal. When things are tight at low or zero interest, nothing is spent. Those who maxed out their credit cards during the Greenspan era can no longer spend their future. Is this low or zero interest a product of the free market system we all love, trust, and believe in?
    You remember, the free market system that was emphasized in elementary school as the best available in the world and a necessity in our capatalistic democracy.

  • http://minyanville.com Keith Jurow

    Warf,

    Great question. Collusion by central banks is hard to catch. One example of open collusion was the agreement of European central banks to sell off their gold reserves starting in 1999 — averaged 400 tons a year. That was the main reason that gold prices started sliding. That agreement ended in 2009 and resulted in the soaring prices since then.

    But now central banks have started buying gold — India, Russia and China are the main ones. And private demand for gold delivery is also growing steadily. Check out the World Gold Council figures. Anyone who thinks gold is in a bubble just doesn’t understand what’s going on apart from GLDs. The entire world-wide investment demand for gold last year was only $150 billion. That’s a drop in the bucket compared to stocks, bonds, even real estate.

    As for the Fed, start checking its H-8 release showing bank assets. The amount under “trading assets” has soared. That’s the trading desks of the large banks mainly. They are so long it’s incredible.

    The bust in commodities is coming and it will be pretty ugly. As for the precious metals, they are in a battle to the death with all fiat currencies. Want to bet on the dollar? I wouldn’t. Watch for businesses to start insisting on gold clauses in contracts. It won’t happen overnight, but they can do it without the Fed’s okay and courts will probably enforce them. The free market has a way of asserting itself.

  • Tim

    Man I love you guys. Smart commentary

  • The small boob girl

    1. Recovery? Does anyone watch the news anymore? The Federal gov’t does not even have enough money to pay its employees! More than half of the state gov’ts are on the edge of bankruptcy! The US gov’t is just printing paper money! We don’t have real money! And I am sure all of you genius already knew the Chinese’s gov’t is getting rid of US dollar for more than a year now. I just want to remind all of you, the rest of the world is not going to keep paying for our debts! They are not stupid! They know that the US gov’t is just printing paper money! It’s not hard to see the possibility of the abandonment of US dollar as the world’s basic currency.

    2. Can’t anyone see the frequent disasters happening around the globe? Is it so difficult to see a shortage of food supply is coming? There is almost a 6M or bigger earthquake popping up like mushrooms around the world every month. New Zealand in Feb., Japan and Myammar in March , oh, there is just one happened in Indonesia yesterday! If any of you thinking this change of the Earth’s condition is not going to affect our food supply, you shall really go and hit wall!

    3. Extreme political turbulance around the world. I guess everyone knows what’s going on in Africa so I will only say something you don’t know. As of yesterday, several big chat room providers in China declared that they were closing down at the end of this month. Not because they don’t make money, but because the Chinese gov’t have ordered them to shut down. China now is shutting down the chatrooms so that the real international news will not get inside. I don’t know how many of you really knows China but I grew up there and I can tell you the international news that you can hear and see inside China is quite different. They are affraid whatever is happening in Africa will happen in China. All travelers possess any newspaper with Chinese on them, will be asked to dump their paper in the airport. In the other words, they want to fool the people inside.

    Conclusion, our situation is much worse than 2008. 2008 is just a beginning. All I can see is that world is a mass. I am sick and tire of any gov’t telling us everything is ok. Guys, open your eys, everything is not ok. For this kind of time, I truly think holding commodity is a very smart choice. In the time of chaos, paper money can’t do anything for you. If the U.S is going to repeat what Britain had to go through in 1970s (which I think it’s pretty much in our face now), a $20 bill can’t get you a gallon a mill!

  • Anonymous

    If you aren’t a producer, transporter, storage faciltity, business end processor/user then you should not be allowed to trade commodities, or at least be required to take delivery. This would allow all precious commodity resources to be priced according to true supply and demand. The whole world would be richer instead of just investment banks and offshore hedge funds.

  • billy h

    Sorry, clicked the button before identifying myself. Didn’t mean to post anonymously

  • Rupert D Bear

    Bang on, you nailed it BOJ!!

  • Ryan S.

    1. We’ve been printing “paper money” since 1971. Big Deal. You also fail to notice the distinction between state and federal governments. The federal government will always be able to pay its employees. Ever heard of MMT?

    2. “6M” is a measurement used for tsunamis, not earthquakes. It took me 10 seconds on google to find that out. ALso, can you point me to a peer-reviewed article in a scientific journal that says that the number of natural disasters we are experiencing is statistically abnormal?

    3. How does China (supposedly) shutting down some chat rooms spell gloom and doom for the economy?

    Conclusion: You haven’t mastered the subtle art of citing your claims with facts or the oft-overlooked technique of proper grammar.

    There’s my trolling for the day :P

  • TS2S

    They’re too busy smoking legal marijuana.

  • Andrew P

    US Companies won’t, but OPEC will. That is when we are really in trouble.

  • http://none don larson

    Good exchange of ideas.

    I just have one question: Who do you suppose strongly influences – - if not out right controls – - Uncle Ben’s decisions; or all of Government, for that matter?

    Doktor

  • Mike Goldman

    “Let me issue and control a nation’s money, and I care not who writes its laws.”

    — Meyer Rothschild (Original Central Banker AKA Fed Chairman)

    * & * Thru Inflation and Deflation You will be Robbed of Everything

    Two separate United States laws are known as the Glass–Steagall Act. Both bills were sponsored by Democratic Senator Carter

    Glass of Lynchburg, Virginia, a former Secretary of the Treasury, and Democratic Congressman Henry B. Steagall of Alabama,

    Chairman of the House Committee on Banking and Currency.

    The first Glass-Steagall Act of 1932 was enacted in an effort to stop deflation, and expanded the Federal Reserve’s ability to offer

    rediscounts on more types of assets, such as government bonds as well as commercial paper[4]. The second Glass–Steagall

    Act (the Banking Act of 1933) was a reaction to the collapse of a large portion of the American commercial banking system in

    early 1933. It introduced the separation of bank types according to their business (commercial and investment banking), and it

    founded the Federal Deposit Insurance Corporation for insuring bank deposits. Literature in economics usually refers to this

    latter act simply as the Glass–Steagall Act, since it had a stronger impact on US banking regulation.[5]

    I agree-what is not to like? Resurrect Glass-Steagall which (until it was torn down by Congress last decade) and prohibit

    investment bankers from owning depositories, banks, and from underwriting securities.. How many times does America want to

    be bent over by Wall Street. We need to make room in our prisons for the Wall Street crooks and end the war on drugs and

    prostitution. Which one cost you your IRA, Pension, and personal Liquidity?

    Wall Street or Main Street ?

  • H. Bell

    Keep thinking we can print money forever without trouble, and you need to do somemore googleing.

  • Anonymous

    The best description I have read of the Fed’s impact on commodity prices is from John Hussman in his weekly notes. A good place to start would be here: http://www.hussmanfunds.com/wmc/wmc110307.htm

    He makes the case, and quite reasonably I think, that QE, by creating tons of non-yielding cash, simply compresses future returns on everything else (stocks, commodities, etc), so that holding anything tends to provide around the expected return (over a 1-2y time horizon) of holding cash.

    Let’s not forget that the Fed is not the only institution involved in QE also. The EU and Japan are also involved massive operations.

  • Steven Douglas

    How about if the good folks at the Fed were just locked in a room. Period. Give them newspapers to read. Or fairy tales, or comic books, whatever.

  • http://www.twittersuccessonline.com Dave Cleinman

    It’s unfortunate that the Fed. clings to its devastating course of action and does not have the courage to warn people what is coming. The need to prevent a market panic is real, but the devastation that is going to hit from the Fed’s printing policies will be worse, still. People need to know what is coming, almost certainly hyperinflation and the death of the dollar, and financial ruin that makes the GD look like a small paycheck. I subscribe to the incompetence theory…the uneducated and bind leading the blind. So it falls upon us to spread the word.

  • Just Average

    Governments can not stop or control the average person from wealth unless they first get them to believe in false currency, those days are increasingly disaperaing, it is that simple.

  • Tom

    One factor everyone seems to be missing as a driver behing grain prices is US ethanol poduction. It consumes 40 percent of the US corn crop and just over 3 percent of world grain production. That may not seem like a lot but it is huge in a market that is highly demand inelastic.

    In fact, grain production worldwide has been growing at a faster pace than world population grow for the last decade. When the US finally gives up on corn ethanol, which is a given since EROI is only 1.2 therms per therm, the world will be awash in grain. And we will have another example of failed federal government policy.

  • duggy

    DON’T YOU GET IT ? THE FEDERAL GOV’T DOES NOT PRINT MONEY ; the deceitfully named “fed” does ; not a government agency ; the fed tries to be “seen” as a branch of gov’t …it is a good actor ; a great deceiver ;
    WE’RE IN THE RED BECAUSE OF THE FED ! !! ! !

  • duggy

    “WE” meaning the officials of the treasury have not printed paper money or any other kind since 1913 when the “fed” was bribed into existence ! !! !
    we may have gone off the gold standard since 1971 ; so what ? nixie had to go away from the gold standard ; we had effing sold all our gold at $35 an ounce ! to furrin interests ! !! ! we had no gold ;

    dollars are backed by the taxing power of the us gov’t ; not the “full faith and credit” [what a bullspin phrase]

    if you understand that the dollars in curculation are FRN’s not u s notes , consider this ; up to 1971 , we [our gov't officials ] backed the fake central banks dollars with ….u s gold ! ! ! !
    the independent “central” bank , the fed , counterfreited american dollars as a private company and the public government backed the fake dollars with your gold ; meaning anybody could demand an ounce of your gold [you own the gov't don't you ? ppppptttthhhh ! not ] for 35 frn’s ! ! ! ! 35 bogus dollars ; play money ; the gov’t backed a private concern’s bank chits with your and my government gold ! ! ! and they got away with it ! nobody ; no phony media outlet mentions it ;

    the media are handcuffed whores ; doubt me ? who owns the papers and the magic lantern stations [ tv ] ????????????? i rest my case

  • duggy

    the world cental banxx are a criminal syndicate

    http://www.wtv-zone.com/Mary/BIGGESTSCAMINHISTORY.HTML

  • duggy

    wow ; S D ! intelligent life exists ! ! ! !

  • http://Online-Income-Today.com Johannes

    To Small Boob Girl;
    You hit the nail right on the head. The people that think this is over are in for a very rude awakening (called a massive crash) There is no way a nation can climb out of such massive debts by printing more money. Porter Stansberry and Gerald Celente both agree on this, and I would follow their advice before anyone else. I wonder what we would dicover if we truly did audit the Fed and Bernanke both?

  • Marty

    I agree with your comment in part. However, if the Fed “warned” do you really think people would pay attention to this? Critics and contrarians would throw cold water on the comments. The government has no interest in protecting small investors. We are living in the era of economic Darwinism.

  • Steven Douglas

    smileawey wrote: “if the billions of idle cash that sat on the sidelines at 0% interest had been in 5% FDIC bank savings accounts, the banks would not have needed to be bailed out, the savers would have had more money to spend, the economy would have jumped started itself from the extra interest produced cash generated and spent, there wouldn’t have been a credit crisis, there would be no inflation or dollar devaluation in progress, there would be less commodity speculation, less federal tax forthcoming for the next decade.”

    It is even worse than that. Far worse, in fact. By taking currency out of circulation, savers produce a natural force that would increase the value of all like currency. The Fed continuously and deliberately counters this very force by “lending money into circulation” out of thin air. This one (arguably criminal) act SIPHONS all of the value that everyone could have otherwise thanked the savers for creating. The Fed does not “borrow” this value from the savers, because there is no payback – not to the savers or anyone else but themselves. Rather it STEALS this value – again, not just from the savers, but from everyone who holds this currency.

    Give the world a single alternate currency, one that is not subject to artificial inflation or perpetual fractional reserve “value siphoning”, and watch Thiers Law take effect, as the good money “dries out”, and therefore drives out, the bad.

    No “gold standard” needed – especially not one tied to a failing fiat currency, which would be disastrous, let alone impossible. Just competition, that’s all. Remove the “fiat monopoly” once and for all, along with all of the “legal tender” laws which prop them up, and let forces prevail as all currencies seek their own value equilibrium.

  • Frebs

    Not sure I understand this paper fully – the BoJ seems to argue that:

    1/ a large global interest rate gap is a sign that monetary policy is overly accommodative
    2/ resulting in an overheating global economy
    3/ triggering a rise in commodity prices
    4/ therefore, inflation-concerned central bankers should raise rates, cooling the economy and thereby putting an end to the commodity rally.

    (Please feel free to point where I fail to understand the BoJ’s argument)

    The BoJ’s points are quite self-explanatory, but it seems to be rising corn & oil prices are a small price to pay to get out of this slump?… Wouldn’t immediate monetary tightening aimed at bringing down commodity prices be taking our eyes off the ball – ie growth & employment – in some ways? Seems to me the inflation problem should be tackled sequentially, which is what I suppose the Fed has in mind.

    In other news, I am back from a trip to Asia – it doesn’t matter whether Goldman is right and oil falls back to $105; in the long run, we’d better find alternative sources of energy, and in the meantime hold on to those SLB shares dearly !

  • Adam2

    Duh- I finally get what you are saying Cullen about QE2. It is not that it does nothing at all but it does nothing for the “real economy” ie the economy of goods and services.

  • Humble Genius

    Please, someone correct me if I am wrong (freely) but…

    …If I were at the Gov’t seat, and would not like to simply become a spectator of (for instance) a) the pervasive effect that such massive trade imbalance with China, and then converting our payments into DEBT in our balance sheets (because that’s the net result of our trade with China), b) an almost collapsed/imploded local economy due to a bunch Financial criminals (and foolish consumers)… c) did not want to lose the next elections, then…

    …would the current commodities rally be the result of a completely deliberate and purposefully engineered move to make funds available to the market, have these QUICKLY driven out INTO commodities world-wide, inflate this sector at will, and later terminate such investments at their peak, and bring back home the gains, mercenary/cold blood-style? Would not this the expertise acquired by the U.S. Financial market during the last crash, and could it be at play YET AGAIN, but this time with better control of the “nuclear-fission” process?

    …My apologies if this sounds aberrant, but… when I read “financialization” of the commodities market, “portfolio rebalancing”, “tight correlation of commodities with other assets”, and “money flowing into the sector” and the “FED having a direct impact on commodities”… it all sounds too correlated, to me.

    My 0.01c

  • The Last Boomer

    The interest rate gap is much larger in the emerging economies than in the developed economies which means that the emerging economies have much more accommodative policies than the developed economies. Accommodative policies in China are much more responsible for the commodity rally than the Fed’s policies. Let’s laid the blame on where it belongs.