Unified Mandate for the Fed

In the Fed's dual mandate (fighting inflation and attaining full employment), the Fed and the rest of us get a lot of stress.  And the distortions created by the Fed (and other central banks) with their massive monetary swings -- with varying lag and lead effects -- has defeated the best business leaders and small and large investors.

As in physics, we would hope that a unified approach would aid the Fed's noble goals of being a stabilizing force that the Congress and Executive Branch can not.

In this, perhaps they would consider:

"Stabilization of input prices"

As in prior writings on "Commoditists" -- it would seem that business recoveries are quickly beaten down by higher gasoline prices and raw material prices -- that often rise at the earliest signs of recovery due to speculation.  It would also seem that many recoveries are slow to start because of a fear of rising input prices, volatile demand environment, but perhaps most importantly -- the volatility of commodies, inputs . . . including the cost of money.

If we take this broadly, input prices include raw materials, labor cost, capital costs, etc.  If the Fed could stabilize these components -- I would conjecture that prolonged and rapid recoveries become more possible.

The key to this is the Fed's increasing focus on long-term and not short-term rates.  Historically, the Fed has focused on short-term, even-overnight kinds of money supply effects.  Now with quantititative easing and assurances of low rates into the future -- the Fed seems to be realizing that equity prices (the risk assets that they seem to be promoting) and funds for capital investments are driven by longer-term interest rates.

With this, and their "bully pulpit" and regulatory muscle, I would hope that they could:
- Reduce commodity speculation
- Manage long-term capital costs
- Strive for stable labor costs that lead to business growth and fuller employment
- etc.

This would seem a better approach. 

Fighting inflation had tended to be for the benefit of lenders and currency holders.  Now that countries are trying to fight deflation and create the inflation that will aid borrowers and consumers -- this too turns out to be a mandate of political expedience.

What's a Commoditist?

For those of us taught neo-Keynesian in college, monetarist in B-School, and libertarian in life -- we are discovering that these do no longer are very relevant in driving business cycles.

They do seem effective in creating big governments that spend inefficiently, massive distortions in asset pricing, and creative risk takers that beat the system (at the system's cost).

My small voice is that business cycles are now driven by input costs . . .

We are familiar with the oil crises and more recently shortages of food that caused rioting around the world.  Commodity prices seem to fluctate with Chinese economic conditions.  And growing economies are betting heavily in raw materials -- from energy, iron ore, and increasingly water.

In the relatively quiet Asian front, "war" is now breaking out over ownership of small islands in the middle of the ocean.  I think most realize that much of this involves ocean bed mineral rights.

I suppose in most ways -- this is all natural supply-demand reactions.  The biggest distortions are caused by speculation -- fueled by low margin requirements and low cost of money.  I would hope that financial regulations will increasing focus on the impact of speculation on distortion and volatility of commodity prices.

So we have seen:
- Economic recovery seemingly quashed by rapidly rising gasoline/oil/energy prices.
- Business profits negatively impacted by raw materials/ingredients prices, even as sales only begins to pick up.
- Economies and currencies like Australia and Brazil buffeted by commodity prices.
- Fight between food and energy (e.g., ethanol production).
- National and global disasters from nuclear energy production.
- And very basically, huge bubbles created by the Fed and other bankers manipulating interest rates and other monetary measures.

It would seem self-evident that commodities (and other inputs) that are driving and causing cycles.

[Please see following post on "Unified Mandate for the Fed".]