More Market Madness

Another crazy week on Wall Street as Bernanke decides a little inflation is a small price to pay for keeping his banker buddies in reach of their seven figure bonuses. It’s too bad Congress can’t get its collective head out of its collective dupa long enough to actually consider policy anymore, or this guy would be on a very hot seat indeed.

Think about it. The reason oil is approaching $100 a barrel is that oil is priced in dollars. So, when the dollar loses its value (like, say, from a cut in dollar-denominated interest rates), the price of oil MUST rise for oil producers to maintain their real price. And this is true of any internationally traded commodity. Which means that we in the U.S. are now paying more for those commodities. And that, my friends, is called inflation.

Taking this a slightly different way, if you were smart during the housing bubble (like I was), and didn’t overspend, you might’ve put your excess money in the bank. Well, guess what? Thanks to Mr. Bernanke, the real value of that money you stashed away is now worth less than it was when you put it there.

The same is true for any asset. So even if you bought a home prudently, the value of that home is now being inflated away.

So who wins in this situation? Well, people who hold debt. It’s a bit of a wash for homeowners, because most are likely to have debt behind their previously overpriced home. So the effects cancel each other out to a point. But think about the banks that have bad loans on their books. The faster inflation works, the faster the nominal value of those bad loans becomes insignificant, and the faster the banks find themselves back in the black.

Who else benefits? Could it be, oh, the Bush administration? Keep in mind that much of the Iraq war has been paid for with debt. So it benefits Monkey Man & Friends if the value of that debt (in nominal terms) is smaller than it was previously. Of course, that means that the dollar itself is worth less, which means that prices for commodities like oil are higher, which means that … oh, but we’ve covered that already.

Bernanke is proving himself to be quite the weak-kneed sissy when it comes to monetary policy. Alan Greenspan must be beside himself right now. After more than 20 years of discipline (albeit while turning a blind eye to the dangers of the housing bubble), Bernanke is turning the U.S. into a slightly less fun version of Argentina. Thanks, Ben.