While central bankers are “experts” on economic theory, we would all be well served if they had a little education on real world physics—that is, those immutable laws governing the universe that aren't subject to the whims of economic mis-interpretation. One of the most well-known of these comes from Sir Isaac Newton’s three laws of motion, which is that for every action there is an equal and opposite reaction.
It is imperative for central bankers to learn their actions are not made in a vacuum but have wide array of consequences for inflation, economic activity, and currency fluctuations. While US Fed Chairman Ben Bernanke may state that inflation is well contained, it appears he may finally get his wish of higher inflation which he stated in the December 2010 FOMC meeting was below desired levels.
What’s the easiest way to boost the inflation rate? Simple, just depreciate the home currency. This was exactly what FDR did in the Great Depression to break the back of deflation, and Fed Chairman Benanke, a student of the Great Depression, is following right along in conjunction with President Obama in carrying out FDR’s game plan as highlighted by David Rosenberg below.And how might this play into Bernanke’s opinion that inflation rates are too low? Easy, devalue the USD and up go commodity prices. As seen below, there is a negative correlation between the CRB Raw Industrials Index (black line) and the USD (green, inverted). Of note, the secular bear market in commodities using the CRB Raw Industrials Index as a proxy stopped dead in its tracks when the USD peaked in late 2001. Also of note, the CRB index peaked in 2008 when the USD bottomed. Conversely, the CRB index bottomed in late 2008 when the USD peaked. The CRB index has broken out to new highs as commodity traders are likely pricing a lower USD ahead. (more)