Chairman of the Federal Reserve Ben Bernanke is largely responsible for the 1 percent interest rates under Greenspan in 2003-2004 that contributed to the housing bubble, and Bernanke is absolutely responsible for the $2.3 trillion of asset purchases and zero percent interest rates over the past three years. His policies, and his policies ALONE in conjunction with fiscal spending, are responsible for the following charts. The nearly one-to-one correlation has to do with the institutionalization of financial markets in commodities (backstopped by the Fed) over the past 30 years. Everything you read about growing global demand, diminishing supplies, global unrest, political instability, etc. etc. etc. is merely at the margin and largely the conjuring of the media to pocket whatever remaining disposable cash you may have left after the following has destroyed your purchasing power:
The “crash” in commodities that took place during the winter of 2008 that saw crude prices drop from $150 per barrel to $30 over three months time in direct correlation with the fall in price of every other commodity was nothing more than a reversion to normalcy. There was no crisis, no panic. It was the cleansing of exuberance, of stupidity, of irrational exploitation, of utter nonsense.
And now we’re right back. Thanks, Ben.
The difference now is that Americans are not insulated by high home equity and a strong labor market like during the lead-up to the bubble five years ago. The stock market may at present be robust, but the gains over the past three years priced in real terms relative to the rise in the price of commodities, particularly gold, is actually negative. It’s fluff.
Also, consider this: Bernanke likes to point to the fact that all the loans, totaling somewhere between $7 trillion and $16 trillion, made from October 2008 through early 2010 were paid back, and the Fed (and so the taxpayers) made money. The Fed just paid the Treasury $77 billion in 2011 and $80 billion in 2010 for the earnings on its balance sheet. Hey, great. But all that money just went to re-cap banks, institutions, insurance companies and the like to make outsize gains in the rally that was about to ensue, to the tune of 100 percent or even multiple doublings. If the Fed had just simply purchased $7 trillion of soybeans, for instance, taxpayers could have netted $4.3 trillion. We could have then paid for all of Obama’s deficits to date! Hurray, problem solved!
Investing ten percent of the world’s total GDP into soybeans may be impossible, but it’s not too far off as ludicrous as just giving it away to a handful of financial shells to re-inflate illusory wealth that never should have existed anyway.
This whole situation is far from simplistic, but understanding the effects is as simple as reading the charts. The price of such a diverse array of inputs (commodities) should not trade in such direct correlations as they have under the era of easy money, the stock and bond markets included. These movements will have a serious effect just as they did in 2008. Reversion to the mean is always inevitable in some not-always-observable fashion. To boot, the quicker they diverge, the quicker and harder they revert. Whether Bernanke succeeds with his monetary experiment by bringing up employment and GDP is not of concern if in a short-period thereafter it crumbles under its own weight.