What my vote costs?

Upfront: I'm a John McCain Supporter. I’ve donated to his campaign, and more than just a trivial amount. Proudly, I supported him in the Summer of 2007 when everybody and their brother was writing him off.

With that disclaimer being said, my vote is for sale. (Not literally Mr. FBI man, but in a figurative way) The question is this: what is the cost? The cost is the first candidate that comes out ands talks tough about reducing inflation. The first guy that comes out and says he is going to put pressure on Bernanke to raise the Fed Funds Rate is going to get my vote.

Why is this important? Because all commodities are affected by inflation. While not all of the price of a commodity is due to inflation effects, some of it is. (We would still have higher gas prices, but they would not be as high) When the cost of money is high, it is expensive to have money tied up in a commodity, when the cost of money is low, it is cheap to hold commodities.

Here is an example: I have a $1,000, and I want to buy a futures contract to get corn delivered to me in October. Now, the price I pay is the Cost of the Corn (c) times the Cost of Capital (1+i): (c) x (1+i). For our example, lets say the base case is this: a contract costs $10, $9 for the corn and $1 for the interest. Therefore, I can but 100 contracts for Corn. Lets say our friend, Mr. Bernanke, lowers the Fed Funds rate and makes money cheaper. So, for a while, the cost of the contract would be $9.50; $9 for the corn, and $.50 for the money. So now I can buy 105.2 contracts. What happens is this, everybody can buy those extra 5.2 units of corn, so the demand on corn goes up. When the demand goes up, prices will follow to reduce demand to the capacity of corn produces. So balance is restored to something like this: a contract costs $10; $9.5 for corn, and $0.50 for interest.

The actual machinations for this process are much more complex, but in a nutshell, that’s how Fed Funds Rate affects commodity prices. The draw back is that expensive Fed Funds Rates increase the borrowing costs for business, home owners, and other borrowers of money. The problem is that the Fed is working so hard to keep the Financial Sector going that it has let inflation go crazy. Having Freddie, Fannie, Bear, Lehman, Goldman, etc still functioning is VERY important; but those results have to be weighed against the impact of a family of four paying $300 a week for groceries. Maybe there can be some more pain in the Financial Sector so the rest of the Country is driven over the edge.

Regards,

B

P.S. To see some excellent ecomonics discussion from the liberal point of view, go here.