Thursday, February 3, 2011

Oil Up, Inflation in Europe Up, Trichet Acts Semi-Decisively . . . Which Means He Does Nothing

On the heels of the Egyptian protests, oil prices are up—$91.59 per barrel—and European inflation is also up: January figures for the euro-zone were 2.4% annualized.

ECB and Fed policy?
The European Central Bank (ECB) just announced that it will keep euro interest rates at the record low of 1%. A statement by ECB president Jean-Claude Trichet later in the day is expected to say more or less nothing: Fears about inflation on the one hand, worries about stifling growth with an interest rate hike on the other, the ECB doing the high-wire act between the two. Boo-hoo.

Interestingly enough, Ben Bernanke will give the exact same speech—written by the exact same speech-writer!—at 2:30 pm EST. He too will bitch about how the life of a central banker is oh-so hard, trying to balance inflation fears with attempts to “bolster the economy”.

Trichet and the euro-weenies at the ECB are much tougher with their monetary policy: They’ve been buying up some sovereign debt, sure, just like The Bernank, but they haven’t gone to the QE lengths that the Minions at the Eccles Building have.

The European Financial Stability Facility—which very much looks like it’s being groomed to become the issuer of European-wide debt—might potentially be the vehicle to buy even more European sovereign debt: This will be discussed in an ECB meeting tomorrow, but that seems part and parcel of centralizing Europe’s finances, and not primarily a quatitative easing mechanism.

Bottom line, Trichet and the ECB are expected to raise rates in 3Q/2011, ahead of The Bernank, who has signalled that the Federal Reserve will not raise rates any time in 2011.

Now, this is all good and fine: But what happens when inflation starts hitting the dollar and the euro—bad? Copper is at a historic high of $4.54, wheat and cotton (because of the Australian cyclone) rising as well, not to mention oil—these commodity price surges are creating inflation in the rest of the world: Why can’t there be severe inflation in Europe and the U.S.?

The answer is, of course, that there can be inflation in Europe and the U.S.—in fact, like that giant wave in The Poseidon Adventure, it’s coming our way.

If The Bernank and Trichet stick to their easy money guns, then when the wave hits, they’ll be overwhelmed—and washed away.

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