I like reading the economist and blogger Charles Hughes Smith. He has a lot of good ideas. And certainly his charts and economic warnings are very well known among those concerned with the state of our economy.
However, his recent article published on Businessinsider.com is possibly flawed. Smith is showing how the wealthy will profit and that mainstreet will have wealth stolen from them. While I don’t disagree at all with this premise, I believe the analysis is flawed going forward because I believe the Fed has an Achilles heel. It is oil.
When petroleum goes berserk in price, it will kill the US economy fairly quickly, forcing all the asset prices down. Smith believes this process will be protracted. I don’t. The Fed got away with QE while oil prices slowly rose between $32 and $80 dollars per barrel the past few years. But it is different now. We can’t take $100 dollar oil. The Fed is at the end of it’s rope.
I believe we will hit bottom pretty quickly, requiring the Fed to rethink monetary policy. We have seen what happened to natural gas pricing as a result of the recession.
The Chinese May Rein In Spending If Commodities Run Up In Price
If food, gasoline and other commodities prove to be too expensive for US citizens, the Chinese may reign in spending on these items at the same time. The Chinese want natural resources and have been stockpiling them in the current deflationary environment, but with QE I could see it in the interest of the Chinese to stop doing this. I could see the Chinese seeing the US consumer, their important customer in all manner of purchasing, as being in financial jeopardy due to QE2. We, as consumers in the US, can only hope that the Chinese government acts in her self interest and stop the massive purchasing of commodities. There is evidence this Chinese cutback on raw resources is beginning. It was reported on Bloomberg TV that China is putting a cap on commodity prices. This could also crash the Australian housing market. Certainly that will result in a nosedive in commodity prices, which will give Americans more money in order to buy Chinese goods.We can hope the Chinese will save the US consumer from our own central bank who wishes to saddle us with the huge tax of rising commodity prices!
We can help the Chinese in this hoped for decline in commodity purchasing by resisting price rises in foodstuffs, particularly milk, and eggs, as well as by parking our cars in the garage. I have argued that the US consumer must be frugal and fight asset inflation. This personal frugality can have a macroeconomic effect, meaning it can cause prices of goods in the world to decline.
The US consumer has that power and with a little help from the Chinese, can make this QE2 a failure. Failure of QE2 will force the government to cut spending, and possibly target new deal type programs of infrastructure job creation. Americans will be forced to continue to save and possibly even double up more regarding housing arrangements. But in the long run the US will be more competitive in a world economy. Otherwise, if globalization is unworkable why even pursue it?
In the final analysis, quantitative easing is only successful if there is end demand. In commodities, the “consumer” has been the Chinese government and for finished products the consumer of last resort is the US retail customer. If both can control and temper their end demand, wholesalers will not be able to pass prices along in the US and large mining concerns cannot pass along price rises to the Chinese government.
Now, if China has a never ending, insatiable appetite, that too will possibly come back to bite the world economy. Certainly, China will hurt the US consumer and massively destroy their export base. So eventually, even this behaviour will have a big effect upon the US consumer, who by that time will be reeling.
Keep an eye on China, and how they are purchasing natural resources, and look at prices in the supermarket to tell you where things are going. And then don’t chase these materials up but rather use your power to be frugal. It can work as the US is the largest consumer base in the world by far.