Interest Rate Roundup

Tuesday, April 22, 2008

$119.90 and counting

Punch up a crude oil futures quote, ladies and gentlemen, and that's what you would have seen a few moments ago for the price of a barrel of black gold. Even the "see no inflation, hear no inflation" Federal Reserve crowd can't seem to ignore this market action any more. Bloomberg just ran with a story called "Fisher says inflation beginning to burden consumers." The money quote from Dallas Fed President Richard Fisher: "I'm concerned that we might be on a path of higher inflation that we would otherwise have had."

My general stance is simple: Even the best-intentioned moves can have unintended or unforeseen consequences. The Fed slashed rates to the bone to save the economy after the dot-com bust. That helped cause a housing bubble. Now, it has slashed rates to the bone again to save the economy after the housing bust. What's that doing? Helping fuel (pun definitely intended) a brand new boom/bubble in commodities. And yes, I realize other forces are also at work, such as the "turning-food-crops-into-ethanol" phenomenon and rising wealth and consumption in countries like China and India.

Are we ever going to get off this bubble-bust-new-bubble treadmill? Maybe only when the Fed takes a Volcker-esque approach to monetary policy. In other words, a "tough love" approach where rates are raised or held higher than they otherwise should be to crush commodity speculation/long-term inflation once and for all -- even if it means the economy suffers a deeper short-term recession.

Would that cause more banks to fail? Probably. Would it drive unemployment higher? Yes. But the alternative seems to be "rice riots," a further gutting of the U.S. dollar, $6-a-gallon milk, and $3.50-and-rising gasoline prices ... despite a weak economy. We're all getting hit in the wallet ... and the Fed's inflation-flighting credibility is going up in smoke ... as a result.

I found this story on Kimberly-Clark's earnings to be particularly illustrative of how corporations and consumers are being forced to adapt (emphasis mine):

"Chairman and Chief Executive Thomas J. Falk called the first-quarter results a good start to the year despite "unrelenting inflationary pressures," especially for fiber and energy. He said the company was reducing costs where it could but increasing the marketing of its brands.

Falk said the company underestimated its exposure to inflation by $100 million to $200 million.
He said the company will try to offset the increases with more revenue instead of more cost-cutting, and that if inflation continues at its current rate, Kimberly-Clark will raise prices.

Kimberly-Clark pushed through price increase of 4 percent to 7 percent in February on diapers, training pants, bathroom tissues and paper towels, yet saw no loss of market share to cheaper private-label brands, Falk said.

"That would say the consumer is holding up pretty well in this environment," he said, adding that female shoppers are looking to give their families "little luxuries that don't cost that much more," such as premium tissues.

Kimberly-Clark has been more aggressive in raising prices on commercial customers, such as office buildings -- sometimes twice a year. Executives said they would pave the way for even faster increases by changing contracts to allow price increases any time, not just when the contracts expire."

In other words, we're facing stagflation-lite. Is that really better or worse for the economy and Americans in the long term? Maybe someone should ask Ben Bernanke.


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