Friday, July 4, 2008

Poole sympathetic with ECB but not with FED (fg)

In today's FAZ online issue, I found an interview with Bill Poole, former President of the Federal Reserve Bank of St. Louis.

Poole confirms that he sees U.S. and world inflation cleary at the upside risk. He embraces yesterday's interest rate hike by the ECB governing council and indirectly blames the FED for her inactivity.

In his opinion, the FED intentional creates inflation to reduce stress on part of borrowers. High inflation, thereby, let real outstanding debts shrink which contribute to a seemingly more healthy balance sheet line-up (to put it in Minsky's words: The aim is to transform a Ponzi-financed economy back to a speculative-financed one). To him, the falling dollar is the best indicator of high and lasting inflationary pressure in the USA.

The 60s immediately returned to my mind where the US in a similar way created inflation paired with dollar depreciation to "finance" the war chest. Today, it's not (only) a war, it's the fight against financial distress. However, the FED is not recognizing that she just postpones the necessary adjustments of relative prices. The FED might try to inhibit economic slowdown but she'll be the root of the next unsustainable boom. Q.E.D.

@ oil prices
Any excuse that high oil prices are an exogenous event which cannot be handled by a central bank may be correct. But, it misses the point! How in hell is it possible that we speak of global liquidity and admit that central banks across the world are responsible as a whole for such high measures; in the mean time we forget to mention that oil prices are driven by high liquditiy. Many commentators would object by claiming that it is the excess demand which triggered the oil rally. Well, this may be true but the big question is why did excess demand emerge? Due to a (unsustainable) growing Asian economy? If yes, we must ask why are the Asian tigers and China growing that boundless? Fortunately, we see limits at the horizon, and the reason is easy: the USA are shipping inflation to the periphery with its fixed exchange rate system; the core (USA) creates massive nominal demand and inflation abroad. Now, why are we wondering that oil prices are soaring? To define it as an monetary-policy independent event would be a silly logic!