An open window

Ben Bernanke’s mandate is to protect American employment and price stability. But he lives in a large, well furnished unit of a block of flats with central air conditioning.

He has stunning penthouse views of the global monetary landscape. He may wish to freshen up his living room. But if he leaves a window open, the air from all the other units (some plush, some modest) also seeps out – that’s how global capital moves.

When the Fed Chairman discussed monetary strategy on Friday, October 15, at the Federal Reserve Bank of Boston, he confirmed what investors anticipated: a further round of quantitative easing, QE2, is sailing ahead full speed. In characteristically no-nonsense language, Bernanke conceded that, with short term federal funds interest rates targeted between 0 and 25 basis points, ammo is dwindling.

He conceded that “possible costs must be weighed against the potential benefits” of a QE program. But he then cited only two costs: (1) inexperience at judging and communicating an appropriate pace and quantity of Fed asset purchases, and (2) reduced public confidence, leading to increased inflation expectations. Yet he failed to mention, even once, the risks of exchange rates, surging commodity prices and swelling emerging equity markets. (article continues below)

Let’s make a chronological list. In the longish run—as Bernanke did indeed briefly mention—inflation might run away, should the Fed lose control of expectations, despite all efforts to trumpet its intentions. Meanwhile, the Fed’s balance sheet keeps expanding.

Short term, we can anticipate other second order effects. The dollar will keep plummeting from its current level of 76, already a 10-month low against a basket of six major currencies. As the world’s reserve currency, in which commodities are priced, a falling greenback pushes oil, gold and other hard assets in the other direction. Rising agricultural prices are already affecting consumers in Asia and Latin America. 

Meanwhile, unleashed American money continues to pour into emerging markets, which have even outperformed the S&P’s breathless two-month rally. In a centrally air-conditioned building, it’s hard to control where capital will escape. Right now, it’s flowing to emerging markets, building new bubbles.


Vanessa Drucker is the American Editor of Fund Strategy, based in New York City. She has worked as a financial journalist for 20 years. In the 1980s, she practiced banking and securities law on Wall Street, and is the author of two business novels. Vanessa can be contacted at