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More cheap money means dearer food, dearer clothes and more expensive energy. Minutes after the Federal Reserve on Wednesday loaded its blunderbuss with $600-billion of freshly minted cash and began to aim it at Treasury bills, the hedge funds began to buy oil futures.
The Fed wants inflation and, lo and behold, it's getting it with the price of West Texas Intermediate and North Sea Brent up almost dollar on Wednesday and WTI up another dollar Thursday, just shy of $86 per barrel. We are not yet at levels where the price is destroying demand but where is that level? The Fed wants to get America motoring but what we need to know is how many dollars per gallon keeps Joe Plumber off the road. In the summer of 2008, the average price of gas in the U.S. hit $4 per gallon and it has been gently hovering just shy of $3 in recent months. We know that $4 per gallon was a hammer blow to energy demand.
The effect of this barrage of cheap money must keep the dollar weak and in the short-term funds will continue their search for dollar hedges and better returns. On the one hand funds will buy emerging market equities and high-yielding junk bonds but they will also switch from financial to dollar-priced physical assets, such as gold and oil. The Fed's behaviour is also giving a financial fillip to other commodities, such as copper, cotton and corn where the fundamentals are good. Cotton has doubled in price since February and it gained almost 2 per cent on Wednesday in response to the Fed's money shower. There are real fundamental reasons for cotton's price boom: weak harvests and Chinese demand. But the weakness of the dollar provides the platform on which investors can turn the fundamentals to price advantage. These commodities are in demand in emerging markets and the need dollars to buy them. As long as the dollar continues to fall, Chinese oil refineries can buy more crude and textile mills can buy more cotton.
But it won't help consumers with weak currencies. Next, a big UK fashion retailer, on Wednesday said that sticker prices on clothing would be up 8 per cent or more next year due to rising cotton prices. Next blamed speculators for stoking the fire that was lit by a genuine shortfall in cotton supply. Cotton is only 8 per cent of the cost of a pair of jeans or a shirt so retailers don't tend to protect themselves from these commodity exposures as hedging is expensive. What is interesting is that the high street is telling us that retailers have no intention of absorbing the pain.
Nor, it seems are the Asian mill owners willing to swallow the commodity pill. Arvind, an Indian textile manufacturer, which is one of the leading suppliers of denim fabric to Levi Strauss is reported to be putting up its prices by 8 per cent with Indian mill owners complaining of 20 per cent increases in the cost of yarn. And food will cost more as rising grain prices ratchet up not just the price of bread and cereals but beef too, as farmers pass on the burden of more costly animal feed.
The Fed strategy will raise living standards in commodity producing nations and stoke inflation in consuming nations. It's a delicate balancing act for Washington's policy-makers and past experience suggests that this kind of tinkering always overshoots unless you have the range of control and levers of a Chinese manadarin over demand in the economy. All that Ben Bernanke, the Fed Chairman, has left is the printing press.
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