There was a pessimistic but mostly unremarkable speech by Fed chief Bernanke on Tuesday which the stock markets did not like. But the Economist finds that Wednesdays speech by the New York Fed chief Bill Dudley was more revealing. It headlines accordingly: Read this speech, then sell the dollar.
Dudley analyzes what the Fed is to do to help revive the U.S. economy. He essentially says that the U.S. has to deflate the dollar to export more and it can not help if that drives up commodity prices around the world. Like Bernanke he did not announce a third round of "quantitative easing", i.e. large scale money printing by the Fed, but that is the logical consequence of his analysis and the major tool the Fed has to drive the dollar down.
I do not agree with Dudley. What is primarily needed is more demand stimulus in the U.S. This is a fiscal task, not a monetary one. It could be achieved by taking money from the richest 1% and distributing it to the poorest 25%. It could also be achieved by the government spending more and taking on more debt. But Obama and Congress are not in the mood to do their job and therefore the Fed will be pressed to help out.
As long time Fed watcher William Pesek explains it:
The first round of quantitative easing stabilized the U.S. financial system and calmed nerves around the globe. The second one disappointed, as evidenced by the slowest pace of growth in U.S. payrolls in eight months during May.
Congress is gridlocked, making new fiscal stimulus measures unlikely. That leaves the onus on Bernanke to pump liquidity into the economy. He will face huge resistance from those worried that he’s debasing the dollar, yet Bernanke may have no choice.
Political gridlock in Washington makes sane fiscal policy impossible. The Fed will be asked to help out. This even while the negative consequences of further money printing are much larger, locally in the U.S. but also world wide, than those of more U.S. government debt.
Currencies in the emerging economies, especially in Asia, are rising against the dollar. Dollar denominated commodities are also again on the rise. For the people in the U.S. this will mean higher cost of living even while the high unemployment rate will prevent any wage increases. The standard of living will go down.
But rising commodity prices has also large geopolitical consequences. The two graphs in this piece make pretty much clear that the Fed's second round of quantitative easing led to a lockstep increase in commodity prices. Sharply increasing bread prices (food is just an energy storing commodity) in some poor countries then led to revolution attempts in Tunisia, Egypt and elsewhere. Sure, rising bread prices were not the only reason for those revolutions, but as the second chart in the link above shows, they are historically a very significant factor.
As the Fed now plans again to use its magic by creating more dollars from hot air, thereby increasing dollar denomitated commodity prices, brace yourself for more upheaval all around the world. And for more wars.