Sometimes a Cigar is Just a Cigar

Yesterday I was annoyed with Doug Lowenstein, president of the Private Equity Growth Capital Council who suggested that the private equity industry was somehow totally removed from the rest of the world financial system. It was breathtaking to me how he could utter such self-serving statements and keep a straight face.

Today however I am confronted with an argument that goes to the other extreme. Paul Ryan, the new Budget Committee Head in the now Republican-controlled House of Representatives seems intent on blaming anything and everything on Professor Bernanke. Mr Ryan's game plan is to make Bernanke responsible for every economic ill facing "the ordinary American voter".

The charge today is that soaring global commodity prices are all as a result of the Federal Reserve's monetary policy.

The thought process goes like this. Rather than seeing TARP and QEI and QEII as actions designed to save the financial system in the former and to provide economic stimulus in the latter all of the actions are described as budget-busting and inflation-stoking.

These actions by the Fed allegedly created anxiety and panic in investors about the long-run stability of the US$ and "forced" investors to become prey to commodity fund salespeople!

Adding fuel to the inflationary fire the argument continues that keeping US rates abnormally low spurred investment in emerging markets causing the equity, bond and commodity prices in those countries to overheat. The same people who decry the Fed's decision to keep rates low accuse the European Central Bank (ECB) of mistakenly raising rates in '08 out of fear for inflation at a time Europe's economy was crashing.

To be fair, some commentator's also blame the monetary policy of the People's Bank of China for some of the global inflationary pressures they see on the horizon. They do however completely ignore the fact that China's rapacious economic expansion is consuming commodities at an incredible rate both in terms of today's needs as well as in trying to secure resources for the future.

They also seem to forget that economic growth, and that is what they are clamouring for, puts inflationary pressure on commodities-unless you have an inexhaustible supply of resources. We don't.