• Third, low interest rates encourage the creation and expansion of speculative funds (such as hedge funds), which seek to capitalize on escalating commodity prices, which has the effect of sending overall prices even higher still.

Bail Out Homeowners (or) Feed the Poor

While Americans consume only moderate quantities of raw commodities as a percentage of total consumption (there is little, if any, iron ore in an Apple Inc. (AAPL) iPod, for instance), for poor people in the Third World commodities still account for the bulk of their budget. While increases in energy and metals prices simply raise the cost of living, food-price spikes are much more serious, since they directly and significantly erode the living standards of the world’s poor.

Still more disturbing is the fact that the recent surge in food prices (which has been extreme, rice alone having trebled in price in the last year) has caused the beginnings of a breakdown in the world’s free trading system in food. Rice exporters such as Egypt, Indonesia and Vietnam are restricting, or even prohibiting, the export of certain kinds of rice, moves they’ve made to try and keep prices of that commodity down in their home markets.

Since many poor countries such as India also subsidize basic food prices to limit urban unrest, national budgets are being thrown out of kilter.

At the margin, for the very poorest people in the least competently run countries, the result of this food-price surge is likely to be starvation.

New crop plantings will alleviate the problem within a year, but for many, that will be too late: You can defer an automobile purchase until next year, but you can’t stop eating.

Bernanke no doubt hopes that he can keep interest rates low and thereby stimulate the U.S. economy and solve the housing problem, wringing out any inflationary results by pushing rates higher once housing has stabilized and the U.S. market has moved back onto a growth track. That appears excessively optimistic. A prolonged period of low interest rates will perpetuate the bubbles in energy and commodities, which will have two effects.

In the United States, it will firmly establish an inflation level of 10% or more, which will require a wrenchingly difficult recession to emerge from, as it did in 1979-82, thanks to a managerial miracle by then-Fed Chairman Paul Volcker.

But in poorer countries, a long run of low interest rates will not only cause inflation and hardship, it will bring starvation as food prices soar well beyond the means of the poor. Hoarding will result, until finally all the world’s food-market mechanisms end up collapsing.

So if the central bank does cut interest rates tomorrow afternoon, think twice before you cheer.