Speculation + Manipulation = Intervention?

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fire was definitely out, economists said.

"The Fed made a choice. It wanted to make sure the economy and financial system stayed in reasonable shape," said Allen Sinai, founder and chief global economist for Decision Economics Inc. "Fighting inflation was not their number one goal."

The Fed was is well aware of the consequences of its aggressive rate cuts, and statements such as the one above from Mr. Hoenig indicate that at some stage the mopping up of excess liquidity will need to commence.

Savvy traders understood that the Fed's top priority was protecting the economy. They saw that the Fed was not fighting inflation and was pouring liquidity into the financial system. In order to make money, these traders bought commodities as a hedge against inflation while simultaneously selling dollars, economists said. That made the

problem worse, by pushing down the value of the dollar and further boosting prices for grains.

"When speculators saw the U.S. economy was stumbling and there was uncertainty about the dollar, speculators bought real assets: oil, gold and commodities," said Jim Glassman, economist at J.P. Morgan Chase.

Some economists already see the music stopping and the lights coming on at the speculators' commodity-price party. "We may see a sharp reversal in energy prices and the dollar, simply because they've stretched it so far beyond what the economic reality suggests is an equilibrium price," said Bruce McCain, chief investment officer at Key Private Bank in Cleveland.

But others, including Sinai, said that as long as the global economy remains firm and central banks focus on protecting economic growth, commodity prices won't fall all that far. [to which we add: but fall they likely will.]

So, was the spike due to insatiable demand, or to something more basic - like greed and opportunity?

" In recent months, hedge funds, pension funds and other group investment vehicles, which strive for maximum return in minimum time, have turned the commodity market upside down. These funds of the rich and famous, facing difficulty in the stock market lately, turned their attention to the commodity market. Instead of trading in blue chips and other stocks they began trading in commodity futures -- setting off the current steep rise in commodity prices.

Hedge funds and others have gained piles of cash from Middle Eastern oil-producing nations in the last three years. As oil prices scaled new heights, a situation like that of the mid-1970s emerged, with oil producers needing a place to park their extra cash. It was handed over in bundles to countries including Brazil, Argentina and Mexico. These countries borrowed the money, misspent it, and soon had to be bailed out by the International Monetary Fund.