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

In the Downdraft of Hormegeddon

Bill Bonner

The economist Milton Friedman didn’t go far enough when he said, “Concentrated power is not rendered harmless by the good intentions of those who create it.” Oftentimes, that power is rendered more harmful -- to the point of Hormegeddon -- the better the intentions behind it. In today's essay, Bill Bonner highlights the conditions necessary for popular delusions and the disasters they lead to. Read on...


Addison Wiggin
Health Care Costs: Still the Pig in the Federal Python

Addison Wiggin

Right now, health care makes up about 25% of the federal budget. A scary statistic to be sure... But here's an even scarier one: health care's portion of the federal budget doubles roughly every 20 years. Yikes! Addison Wiggin explains why this is and what needs to change to prevent health care from taking up half the federal budget. Read on...


Six Signs Your Government’s Too Big

Chris Campbell

Is your government too big? Find out in today’s Laissez Faire Today with six “red flags” to look out for. Chris Campbell covers everything from one ObamaCare whistleblower to the strange case of our new Ebola czar. Read on…


McDisaster: Fast Food Is Dying – Make a Killing From It…

Greg Guenthner

McDonalds stock is getting crushed right now. Shares have been in a tailspin since June. But it’s not just Mickey Dee’s. Coca Cola shares are in freefall, too. Bad news for them. But if you want to rake in a pile of easy money, it could be great news for you. See, Americans just aren’t choking down this junk like they used to. The fast food burger, fries and a Coke are just down payments on an early coronary - and Type II diabetes. And everyone’s finally gotten the message. So how can you play the trend? Greg Guenthner explains…


In the Year 2024

James Rickards

Panopticon goggles? Severe market panic in 2018? Gold confiscation by 2020? Jim Rickards' shocking thought-piece in the spirit of A Brave New World or 1984. Click to see how markets, economics, your money, gold, privacy, wealth building and more look a decade from now in the year 2024...