Uncle Ben's Rice

By Steven C. Ferguson

Cooking Instructions:

1. Bring inflationary waters to a scalding boil


2. Stir in Uncle Ben’s white rice and, if desired, oil


3. Cover all investment bank losses, reduce rates 25 more bps and let simmer six months


4. Remove temporarily from heat while rice deflates

Rice Instability

Poor Uncle Ben. He cannot seem to find that winning recipe. As the unfortunate host of bearishly ravenous dinner guests, he just had to avoid a financial faux pas… not to mention scathing reviews from stern critics… with a hastily-prepared meal just before last month’s FOMC. But as master economic chef, he must be ashamed, having completely spoiled his secret sauce and Fed family formula for inflation targeting and price stability in the process.

Now it seems painfully evident that no matter what ingredient he substitutes from the CPI basket of goods, he just cannot keep the inflationary pot from boiling over. And with the latest consumer confidence readings, we can definitely see that expectations are not anchored. Apparently, this is one watched pot that does boil, despite any clever claims to the contrary.

Indeed, shady statistics can no longer hide the unsavory truth of monetary and price inflation. And with the harmful ingredients fully exposed, the only remaining beneficiaries of hedonics are the hedonists with their ten-figure bonuses, yachts, vacation homes and sumptuous fare. All the while, the rest of the riotous world cannot even get enough rice to eat. Now that is moral hazard!

Dollar Menu at Benny’s

As Uncle Ben has served up his best to Wall Street over the last eight months, nearly every dollar-denominated item on the menu has gone up in price. In fact, the dollar has dropped so fast that restaurants abroad may soon stop printing menus for US tourists over a concern that prices may double before the main course is even served.

To hedge against this runaway inflation, investors have driven commodities into an outright speculative bubble. For example, Bloomberg News reports that commodity ETFs like the (AMEX: DBA), fueled largely by hedging and speculation, now control half the corn, wheat and soybeans in the United States. The resulting parabolic ascent in food commodity prices has led to multiple, self-reinforcing problems:

• Food hoarding, rationing and shortages


• Food riots in Haiti, Indonesia, Mexico, Egypt, etc.


• Record food prices for consumers and producers


• Difficulty for growers and handlers to manage expensive risks


• Increased debt load to finance inventories


• Greatly diminished profit

Pressure to solve these problems (which are characteristic of unstable, positive-feedback systems) has been mounting worldwide even as a UN Task Force was formed to mitigate the effects of soaring food prices on the poorest of poor.

Price Choppers

Concern that inflationary waters would come to a boil became evident before the March FOMC when the President met with the working group on financial markets. Among the working group members is the chairman of the CFTC. Shortly after that meeting, margin requirements were raised for commodities trading accounts in an effort reduce speculation in commodities markets. Within a day, oil and commodities stocks plunged taking indices down almost 3% during intraday trading.

Later in March, Fed President Gary Stern also suggested that the central bank may need to target asset bubbles. While it was unclear whether Mr. Stern was referring to the growing speculative bubble in commodities or just asset bubbles in general, the timing of the remark was suspect, particularly in light of recent action through the CFTC. It is also worth noting that a concurrent G7 meeting on financial market turmoil likely included discussion of both currency intervention and asset targeting among central bankers familiar with that practice.

Given the ECB’s hawkish stance against inflation, and given that other central banks do not rely exclusively on broad-based inflation targets (certainly not on targets with watered-down and cooked data), it is possible that Bernanke may be relenting in his views. However, his writing suggests otherwise: that "there should be no additional response of monetary policy to asset price fluctuations" even though the (inflation-targeting) approach has "not often been stress-tested by large swings in asset prices."

Well, the stress test results from the housing bubble are in and the patient narrowly avoided a heart attack. Worse, the patient has been overindulging in commodities ever since. In Bernanke’s view "there are good reasons … to worry about attempts by central banks to influence asset prices, including the fact that (as history has shown) the effects of such attempts on market psychology are dangerously unpredictable." Equally dangerous are the results of hyperinflationary intervention to prevent collapse. Why is this evidently so hard to fathom?

Simmer Down

In light of the above, the FOMC will announce its policy decisions today at 2:15 p.m. EDT. Most expect that the Fed will lower rates 25 bps and include statements to suggest that no further action will follow in the immediate future. Alternatively, the Fed could stand pat and let inflation simmer down for a few months.

But will the central bank engage in a more concerted asset-targeting effort to (in the words of Alan Greenspan, 1994) "prick the commodities market bubble?" Or, in a rare but biased show of self-restraint, will the Fed let the market respond naturally to deflationary forces? In either case, the temporary strengthening of the dollar, coupled with coordinated currency support from central banks abroad could have "unexpected" results. After all, such price oscillation is to be expected in a nearly frictionless system with boiling money sloshing around between asset classes.

Whether tomorrow or in 2009, it is only a matter of time before the Uncle Ben's bag of minute rice bursts and splatters scalding water all over the world economy. For now, I would expect the stock market, along with commodities, to simmer down.

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