Friday, May 9, 2008
The: Fed, Dollar and Commodities
"There are plenty of reasons to stop cutting, Real interest rates are firmly negative. ... A growing chorus worries that ever lower policy rates are adding to America's problems. Some prominent economists have urged the central bank to stop. Fed cuts, they argue, are doing little to reduce borrowing costs but have sent commodity prices soaring--fueling inflation and hitting Americans' wallets hard. ... But oil--and other commodities--are the crux of the problem. In the past, economic weakness in America has usually pushed the price of oil and other commodities down. That relationship has weakened thanks to demand growth in big commodity-intensive emerging economies. ... Could the culprit be the Fed? ... Jeff Frankel, a Harvard economist, has long pointed out that low real interest rates lead to higher commodity prices. ... An analysis by Jens Nordvig and Jeffrey Currie of Goldman Sachs show that the correlation between weekly changes in the oil price and the euro/dollar exchange rate has risen from 1% between 1999 and 2004 to 52% in the past six months. ... But commodity prices have risen even when priced in non-dollar currencies. ... So is the weaker dollar driving oil prices up or are high oil prices driving the dollar down? The Goldman analysts argue the latter because oil exporters import more from Europe than America and hold less of their oil revenues in dollars", my emphasis, http://www.economist.com/, 1 May 2008.
Is Jeffrey Currie (JC) serious? Only the Fed prints dollars. Higher oil prices are a change in relative prices, not inflation. I can't believe JC believes what he's saying. Did Hank Paulson induce him to say this to give Helicopter Ben (HB) another rationalization to keep the blades spinning? I keep picking on JC, 24 October and 9 November 2007, 4 and 5 February, 9 and 15 March and 5 April 2008. Is JC a "good GS guy" and part of the apparent GS lobbying effort?