Oil hits $109 a Barrel

West Texas Intermediate Crude hits $109 a barrel in intraday trade.  Your gas will easily top $4 bucks a gallon soon, and the price of traveling around the country will go up.

The rise in commodity prices is not a surprise to people who trade them.  We have seen it coming since the stimulus package was announced in February of 2009.  When the Federal Government decides to print money, it inflates prices.  The Fed really started printing a lot of money before 2009, it was really back in August of 2007 when there was an inkling that something might be amiss in the banking sector.  The Treasury under Hank Paulson swung into action.

You can’t begin to name all the acronyms we have encountered to save the banking sector, TALF, TARP, Stimulus, Cash for Clunkers(a backdoor way to help GM Credit), Cram Downs, stimulus, extended jobless benefits, Quantitative easing, QE2, ; you name it a Keynesian approach was attempted.  The classical approach would have been to lower tax rates, cut spending and let the bad banks go broke.

I know a way to make this appreciation in commodity prices, which causes inflation to stop.  It’s really simple.  Ben Bernanke and the Fed ought to raise interest rates one half of one percent.

The air and froth will come out of the commodity sector-even with all the world wide strife that has accentuated the rise.

No doubt, a rise in the Fed’s short term interest rate will cause the stock market to drop.   But if the market drops and continues to decline, then it was a rally built on a straw house anyway.  Eventually the drop would have happened anyway, it just will hurt more in the future as people plan and price in a rising market.

The price of money is too cheap.  When prices are too cheap, capital gets misallocated and sloppiness ensues.  This causes market failure.  There are opportunity costs to 0% interest rates.  We are learning them as we go forward.  If Bernanke wanted to put some discipline into the marketplace, he should move quickly.  In Alan Greenspan’s words, “It’s time to take the punch bowl away.”

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