Addison Wiggin

“Our interpretation of the increase in gas prices is the economist’s basic mantra of supply and demand,” mused chairman Ben Bernanke yesterday during his first-ever regularly scheduled press conference.

At that moment, the price of oil reached a new post-2008 high.

This morning, it’s pulled back a bit, but not much. A barrel of West Texas Intermediate goes for about $113.15 right now.

“The Federal Reserve believes that a strong and stable dollar is both in the American interests and in the interest of the global economy,” he also said.

At that moment, the dollar index reached a new post-2008 low.

This morning, it recovered…barely…and clings to 73 by some very closely clipped fingernails.

Back when Bernanke signaled the advent of a new round of easy money – QE2 – during his annual speech at Jackson Hole, Wyo. last August, oil was $75 and the dollar index was at 83…

Performance of Oil and the Dollar Index Since Jackson Hole Speech

We agree it’s, as Bernanke points out, due to supply and demand, but perhaps not in the sense he meant.

“He never admits it’s the inflation of the money supply that’s the problem,” Rep. Ron Paul told MarketWatch yesterday, after putting himself through the mild torture of watching the news conference.

“The [Federal Open Market] Committee expects the effects on inflation of higher commodity prices to be transitory,” spake the chairman.

The Fed can no longer assert “inflation” is a nonissue. So the line now is that it’s a “temporary” one.

But even the Fed now admits that consumer prices will likely rise this year higher than the Fed would like. After wrapping up its two-day meeting yesterday, the Fed’s Open Market Committee forecast a headline CPI between 2.1% and 2.8% during 2011.

That’s higher than their original target zone of 2%.

(Yes, it’s the Fed’s goal for your money to be worth 18% less over a 10-year span. And true, that doesn’t seem to fit in with the Fed’s mandate of “stable prices” or their stated belief in a “strong dollar”… but that’s a story for another day. And not to worry, the Fed informs us, CPI will magically return to a 1.4-2% range in 2012.)

“I do believe that the second round of securities purchases [QE2] was effective,” Bernanke said. “We saw that first in the financial markets. The way monetary policy always works is by easing financial conditions. We saw increases in stock prices.”

And there it is… the wealth effect, writ large. The Fed favors the stock market. Savings and investment in a traditional sense be damned.

“Hear, hear!” cheered stock traders, who brought the Dow and S&P to new post 2008 highs. This morning, both indexes have added to those gains and the Dow is now a hair above 12,700.

In sum, the higher inflation target was the news nugget that made its way out of the back end of Bernanke’s dog and pony show yesterday.

Everything else was status quo: Zero-interest rate policy remains in effect… and the $600 billion in new Treasury purchases at the center of QE2 will proceed as scheduled through the end of June… after which the Fed will continue rolling over existing debt to make this chart go flat, at least for a while…

The Fed's Balance Sheet Since the Start of the Credit Crisis

As an aside: The word “gold” did not slip from the chairman’s tongue once while he held court. But the spot price powered to its own new all-time high… and sits still there now at $1,534.

Silver busted through $48 as the chairman spoke. This morning the blaise metal has powered its way to $49.08. Meaning today could be the day the 1980 record of $50 finally goes down.

Where to from here? If the past is prologue, we’re due for something along the lines of when QE1 ended in early spring last year: The S&P fell 13%… and the VIX, the market’s “fear gauge,” zoomed up 48%. Then in August, Ben gave his Jackson Hole speech, and the rest is history.

We figure the Fed will lather, rinse… and repeat: Wait for the stock market to correct, and then launch QE3.

For reference, the S&P is up 28% since, and the VIX is below 15 as we write – as low as it’s been since mid-2007.

Addison Wiggin
for The Daily Reckoning

Addison Wiggin

Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He's the creator and editorial director of Agora Financial's daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar, and Why it's Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.

  • Young buck

    We need a military coup before it’s too late. The existing ruling junta all need to be executed.

  • Dim Star

    If there is a way, WW1 Or 2 wouldn’t have occurred. By swap of juntas would put things back to square 1. I have expected the new junta to perform similarly. Celestial events are not to be handled humanly.

  • CT

    Bernanke is a banker crook and a lier as all bankers are. He needs to be run out of town along with Geitner and his boss. Not sure who his boss is. Certainly not the president robot thats in office now.

  • http://www.nethosting.com Walt

    Supply and demand my foot! This has always been a cabal that is manipulated. Bernanke always looks like a scared squirrel to me when he talks. I can’t really believe that he thinks that there is any sense in his words. You can just tell when someone doesn’t believe themselves, but is put up to it — really nervous guy overall.

  • http://www.manhattancalumet.com james moylan

    I am very disturbed by the lack of progress on cutting the budget deficit. It will require large tax increases and budget cuts to bring the deficit under control. When nobody will buy the debt obligations of the united states than the buyer of last resort will emerge and who might be that buyer of last resort’ the government itself. in other words the massive money printing will have begun welcome weimar republic two thousand ?

Recent Articles

Extra!
6 Reasons You’ll Love Being a Late-Stage Investor

Matthew Milner

When investing in a private company, there are two kinds of investors: early-stage and later-stage. And while early-stage investors have more upside potential, they're also exposed to far more risk. Today, Matthew Milner explains how you can be a successful later-stage investor, and still make great gains, with much less risk. Read on...


Video
How to Predict an Economic Collapse

Kate Incontrera

In his recently released book, A Viennese Waltz Down Wall Street, Mark Skousen gives the Austrian School's take on what triggered the 2008 financial crisis - and why you should be wary of the artificial boom that's driving the recovery.


Laissez Faire
Why Heartbleed Will Change the Internet as You Know It

Mike Leahy

The Heartbleed bug is a massive security flaw that could put you and your personal information at risk. And while there are things you can do to limit the damage, you haven't yet seen the ramifications of this security disaster. The Internet in the post-Heartbleed world won't look like anything you've seen before. Mike Leahy explains...


Big Opportunity in the “Baby Bakken” Oil Field

Matt Insley

As the U.S. "shale gale" nears its 10th birthday, it appears the America energy renaissance has outlived its critics. Still, it's natural to wonder whether all the big gains are behind us. Today, Matt Insley reveals the newest shale hotspot, and explains why there's still plenty of opportunity left in the U.S. energy boom. Read on...


Maestro
The Real Reason the US Media Hates Vladimir Putin

Marc Faber

The U.S., Russia, the EU and Ukraine all met in Geneva, where all sides agreed to halt all violence and provocations in Ukraine. But the news media are still taking an antagonistic stance toward Vladimir Putin and Russia. What gives? Today, Marc Faber explains the hypocrisy behind U.S. foreign policy... and the BS the news media are pushing about it...