The Shrinking Influence of the US FED

[questionmark]

The Shrinking Influence of the US Federal Reserve

By Gabor Steingart in Washington

Humiliation for Mr. Dollar: Ben Bernanke, the chairman of the United States Federal Reserve Bank, faces a general investigation by the International Monetary Fund. Just one more example of the Fed losing its power.

The United States Federal Reserve Bank, or Fed, seems as much a part of America as Coca-Cola or Pizza Hut. But at least one difference has become apparent in recent days. While the pizza chain and soft-drink maker are likely to expand their scope of influence in the age of globalization, the US central bank is finding that its power is shrinking.

No Fed chief in US history has been forced to submit to the kind of humiliation that Ben Bernanke is facing.

This is partly down to circumstances. Inflation is going up and up, and this year's average will likely top 4 percent. But this time Mr. Dollar is also Mr. Powerless. He can raise interest rates in the fall, or he can pray, which would probably be the better choice. At least prayer would not prevent the US economy from growing, a highly likely outcome if interest rates go up.

After years of growth, the United States is now on the brink of a recession, one that is more likely to be deepened than softened by a tight money policy. Investments will automatically become more expensive, consumer spending will be curbed and economic growth will slow down, immediately affecting unemployment figures and wages.

The textbook conclusion is that this will stabilize the value of money, because no one will dare demand higher wages or higher prices. But the macroeconomics textbooks are no longer worth much in the age of globalization. Modern inflation is driven by the global scarcity of resources. Nowadays purchasing power exceeds purchasing opportunity. Most of all, there is not enough oil, and too few raw materials and food products. These increasingly scarce resources are becoming the focus of disputes among many people and billions of dollars are at stake.

This is why the price of a barrel of crude oil (159 liters) has increased from $25 (€16) in 2002 to $135 (€87) in 2008. And it is also why the price of corn has tripled in the same time period, while that of copper has almost quintupled.

If the inflation introduced in the United States is excluded, a small miracle is revealed, namely something approaching price stability. Adjusted for inflation, prices are in fact rising by only 2.3 percent. If this were the extent of it, the Fed chief could simply blink like an old watchdog and go back to sleep. Instead, he is barking loudly, which is his job. But he has lost his bite, because the Fed's interest rate policy can do nothing about the scarcity of goods.

Full story, source: Der Spiegel

[acidhead]

After years of growth, the United States is now on the brink of a recession, one that is more likely to be deepened than softened by a tight money policy. Investments will automatically become more expensive, consumer spending will be curbed and economic growth will slow down, immediately affecting unemployment figures and wages.

The textbook conclusion is that this will stabilize the value of money, because no one will dare demand higher wages or higher prices. But the macroeconomics textbooks are no longer worth much in the age of globalization. Modern inflation is driven by the global scarcity of resources. Nowadays purchasing power exceeds purchasing opportunity. Most of all, there is not enough oil, and too few raw materials and food products. These increasingly scarce resources are becoming the focus of disputes among many people and billions of dollars are at stake.

.. an inflated money supply doesn't help either.. but what do I know?

Edited June 27, 2008 by acidhead43