Boiling Point: What Is The Fed’s Real Plan?

November 11, 2010

Everyone knows commodities are on a tear. But have they considered the Fed’s to blame?

If you ask me, Ben Bernanke is deliberately exporting wealth via dollar devaluation to the emerging markets with hopes that wealth will someday be reinvested back to the States. Step one is in full force, as money is pouring into commodities and commodity-producing nations such as Brazil, Canada and Australia. Step two is where I get skeptical.

Chadd BennettThe Fed’s reasoning for such drastic actions, like the most recent announcement to buy $600 billion in U.S. Treasurys, is that it feels some level of inflation is necessary for it to meet its dual mandate of stable prices and full employment at a time of protracted sluggishness following the collapse of credit markets.

My view, like Jeremy Grantham’s and other critics, is that this will amount to nothing more than a sugar high that will ultimately slow the metabolism of the private markets. In addition, the collateral damage of dollar debasement associated with buying Treasurys with borrowed money and loss of Fed credibility could be much worse than a protracted period of slow growth.

­­­­­­­­­­­­The real question that’s not being asked is whether all this action in the commodities space is related to a deliberate policy move by the Fed or simply a byproduct of it.

The “move” is to facilitate and speed up the wealth creation in emerging markets at a rate which can offset the decline in America’s future purchasing power. My sense is that it has to be deliberate. Why else would they take such risks? And why else would the Fed step up its public relations efforts? The Fed has been known for its secrecy, not its chairman writing columns in the Washington Post or appearing on TV shows such as “60 Minutes” to explain himself.

It could be because the Fed sees people waking up to the fact that gas might be $5 a gallon next year and that Americans might have a problem with it. If America knew that its “trusted” officials were intentionally transferring wealth abroad at its expense, it could make current political movements like the Tea Party look like child’s play.

I believe the “public” intuitively knows this. They know something isn’t right. They just can’t articulate it—yet.

Officials at the Treasury and Fed, of course, will never admit to such deliberate plans. It’s why Treasury Secretary Tim Geithner said at the APEC Japan 2010 Finance Ministers Meeting this weekend that U.S. policymakers are committed to a strong dollar. This is similar to the false strong-dollar promises made before China was allowed into the World Trade Organization in 2001. The dollar index topped a month later, and it now sits 36 percent lower.

Find your next ETF

Reset All