Federal Reserve and Monetary Policy: Katrina and the Fed

The editorial staff at the Wall Street Journal should be “boiled in oil”. Painting the economic landscape with a “very wide gouging” brush just shows what a bunch of amateurs they are. The price signal gouging sends has different meanings depending on whether the product and/or service is elastic or inelastic. The very definition of elastic, in the economic world, means that it is easy for consumers to substitute product B for product A if product A's price is too high. Gouging with respect to elastic items is, in general, a test of price.

It becomes difficult to gage whether gouging sends the correct sign with respect to an inelastic item. One must know the distribution of the items uses. Example: The current housing boom has force the consumers to look for affordable housing outside cities. If there is a large percent of those who drive, live in the large metropolitan areas then the demand for gas is very inelastic (with respect to that group). Consumers' behavior is also effected by duration.

It also become necessary to determine if the consumer has the ability to switch from car A to car B. Buying a new/used econo-box may not be an option. In this case, demand can not decrease. It is better, in the long run, to have prices trend up. This price signal gives consumers time to make the adjustment. The Federal Reserve's Beige Book is indicating consumers are changing their spending behavior.

The current gas situation is not a long term event. The price signs have gone out and laws have been changed to allow the reallocation of global resources to proceed. The US of A imports about 40% of its oil now. Price gouging, with respect to refined petroleum products, sends the wrong signal. There is no global shortage.

I think Wall Street Journal's editorial staff is trying to proect the oil companies. The oil comapnies need no protection. I also think the staff do not give enough credit to the people of the US. We do not need propaganda to car pool. An empty wallet is all the signal that is needed.

Note the use of “GLOBAL”. The US of A is in a global economy, whether people like it or not. The global economy needs the unhindered flow of BOTH currency and INFORMATION. The information that there was a disruption of refined products in the US of A was all the global market needed to begin the process of reallocation global resources. The information the Federal Reserve's Open Market Committee needs to make a decision on short term interest rate is being transmitted by the price action of US Treasuries, the U$ Dollar and the fact that corporate bonds have not tanked.

Long term bonds are signaling that in inflation and inflationary expectations are contained (in the US of A). The dollar has held up. It is signaling the dismay of the global financial market that the US's current account is going to be somewhat of a problem, however, the current trend and sentiment of the dollar index is indicating that there is inflation and inflationary expectations globally. The Fed needs to watch the primary brokers. The watch words are “availability of credit” and “credit quality” (credit is a important as the M2 money supply).


Katrina is an event that can expose the weakness of the Employment Situation Report. If this report has flaws, which is my opinion, Katrina's aftermath will expose these flaws. If Katrina's effect blows through the Credit Derivatives Market and or Hedge Funds World, then the US economy is in big trouble. The housing boom was responsible for 50% of GDP this and last year. The Credit Derivatives Market and Hedge Funds World are the place were credit issuers protect them self. These markets are also the place were airline hedge their fuel cost. In general, these markets are use by companies to hedge their cost. There may not be a Long Term Capital operating, however, there can be many hedge fund companies that can get into trouble and add up to a Long Term Capital problem.