At what price?

It’s supposed to be well-established that commodity prices are the inverse of interest rates. Interest rates are as low as they can be and luxury housing prices in NYC are high, for example, and the stock market is flying too. But the rest of the economy is not wildly inflated. Why?

Easy money (low interest rates) flows into commodity inventories (we saw that leading up to the Arab Spring), on the one hand, and on the other, it curbs extraction of new resources and commodities because the low interest rates reduce their monetization, or so the theory goes. Yves Smith posted on it back in 2008:

http://www.nakedcapitalism.com/2008/03/falling-interest-rates-explain-rising.html
Here are the originals:
http://www.hks.harvard.edu/fs/jfrankel/CP.htm
http://www.hks.harvard.edu/fs/jfrankel/CampbellM&CPnberNov.pdf
http://www.federalreserve.gov/pubs/ifdp/2012/1065/ifdp1065r.pdf

That easy money/low interest rates leads to inflation has been orthodoxy since Friedman at least. It was Volcker’s successful program to curb inflation by increasing interest rates, causing a recession, and Bernanke’s opposite strategy to take us out of recession, allowing inflation. But it also has a specific reflex in commodity prices. QE2 caused a global price hike in food prices as investors left the dollar for commodities, that caused the Arab Spring. Not exactly what Bernanke anticipated. His response was washing his hands: other nations have to deal with their own inflation, he quipped, cynically, I thought.

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