When the Federal Reserve creates new money and/or expands credit, where does this new purchasing power go first? Doesn't it look like it's been sloshing from one investment sector to another?

First the money and credit sloshed into the stock market, which boomed, and then there was a bust. Then it sloshed into the housing sector, which boomed, followed by a bust. Now it seems to be sloshing into commodities.

The great Austrian economist Ludwig von Mises taught that in the last stage of a monetary inflation people seek the safety of real assests, such as gold and other commodities. Doesn't that seem to be what's happening?

But where will the Fed money and credit slosh to next when the commodity bubble bursts? Larry Kudlow on CNBC keeps telling us the stock market will rebound if only the price of oil will fall. Kudlow thinks the price of oil would fall if only the Fed will raise interest rates and thereby make the dollar more valuable. A more valuable dollar would buy more oil. If Kudlow is right then we could find ourselves back where the string of booms and busts started, the stock market.

I offer this "slosh theory" only as an amusement for the perplexed, and not as a guide.

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  Posted by Perry Willis at July 16, 2008 - 08:00 PM | Wealth & Poverty
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Johan X for "Slosh Theory"

Federal Reserve had just gotten into the cheap loans game with the bailing out of various Wall Street firms lately. Well, maybe they haven't. The entrance into the fiscal policy arena by Fed Chairman Ben Bernanke has seen the Fed give out funds and absorb some toxic assets, making some very cheap loans to troubled firms. Market experts have been saying that the absorption of toxic mortgage backed securities is something that the Fed is going to have to eat on its own, and they aren't going to be able to dump back on the market. The Federal Reserve may be next in line for cheap loans.

By JohanX at February 23, 2009 05:21 AM (EST)

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