The Canute Award . . .

Just What We Didn't Need

Ben Bernanke, Chairman of the US Federal Reserve (equivalent to our Reserve Bank) must in in the front line to win this year's Canute award. (The Canute award, to our knowledge, does not exist--but it ought to. It should be given to the public official or politician whose hubris has led him or her most spectacularly to attempt to command the impossible.) Bernanke has thought that he can "stimulate" the US economy by throwing freshly printed money at it ($600 billion).

He has run smack into a minor irritant--the bond market. Clearly, thousands upon thousands of creditors to the United States have taken a different view--one based upon their self-interest, quite understandably. They have reasoned that the fiat creation of billions of dollars will be inflationary. More printed money purchasing the same amount of goods and services will push prices up (due to more money competing for the same amount of goods), which is to say, the value of US dollars will go down, which is the most insidious form of theft of all. So, they have started to move out of owing US debt. The US currency has dropped sharply in value (perfectly rationally so) and interest rates have started to rise--the exact opposite of Bernanke's intent.

The US yield curve (a graph summarising interest rates across a range of debt maturities) is now strongly positive--that is, longer dated debt has a higher interest rate. Usually when longer term interest rates are higher, the "market" (that is, millions of lenders) are saying they expect inflation to rise. They expect that in the future money will be worth less than it is today, so they require higher interest to be paid now to compensate them for their anticipated losses in the future. Hence, interest rates rise in an attempt to keep them interested.

Meanwhile prices are rising.  According to CNBC,

Prices of cotton, silver wheat, soybeans, corn are all up big this year. Cotton futures are up the most, climbing 90 percent so far in 2010. The price of silver is up 63 percent.

and

There might not have been a second round of quantitative easing, if Federal Reserve Chairman Ben Bernanke shopped at Walmart.

A new pricing survey of products sold at the world’s largest retailer showed a 0.6 percent price increase in just the last two months, according to MKM Partners. At that rate, prices would be close to four percent higher a year from now, double the Fed’s mandate.

The “inaugural price survey shows a small, but meaningful increase on an 86-item grocery basket,” said Patrick McKeever, MKM Partners analyst, in a note. Most of the items McKeever chose to track were every day items like food and detergent and made by national brands.

It would appear as though the market is telling Bernanke that inflation is rising and his quantitative easing is equivalent to throwing gasoline on a smouldering flame. And spare a thought for Mr Obama, economic incompetent-in-chief who has been gravely telling the G20 leaders that "Quantitative Easing" was necessary to get the US economy growing again, which in the end would be to the good of all. How terribly inconvenient that millions of investors and lenders to the US think otherwise and are voting with their feet.

It is poetic justice for all who aspire to be modern day Canute's.