Consider the Shanghai red-chip stock market, for instance - one of the four biggest bubbles in stock market history. It increased five-fold in less than two years to a record 6,120 last October, before it deflated by 50 per cent over the next seven months.

Shanghai lost half its value because the People's Bank of China (PBoC) pursued a carefully calibrated tightening campaign that drained trillions of Yuan out of the local money markets. The Chinese central bank "pricked the bubble" in the Shanghai stock market when it hiked bank reserve requirements by 1% on Dec 8th to 14.5 per cent.

One Yuan in every seven deposited with commercial banks was to be left in reserve. In turn, that screw on fresh lending knocked the red-chip index below the psychological 5,000 level.

But the PBoC didn't stop its tightening campaign at 14.5 per cent. Instead, it continued to hike the level of cash that Chinese banks must hold in reserve to as high as 16.5 per cent, and thus dealt a punishing blow to over-zealous speculators in the market.

Of course, the PBoC can afford to tighten its monetary policy. Because unlike Western nations, its banking system isn't infected with toxic US sub-prime mortgage debt.

The PBoC tightened liquidity, with the permission of the central government party bosses – and even at the cost of knocking the Shanghai stock market lower - in order to contain inflation pressures.

Yet despite the PBOc's tightening campaign, China's M2 money supply is still 18% higher from a year ago. Combined with soaring commodity prices, it's fueling an 8.5 per cent consumer-price inflation rate, the highest in 12 years.

Since crude oil is still denominated in the US Dollar - against which the PBoC continues to hold down the Yuan in a bid to retain export competitiveness - it's the Bernanke Fed, which has the "magic wand" that can deflate the bubble in the crude oil market. To do that, it must deploy the same tactic used by the PBoC: Tighten the Fed's monetary policy, in order to strengthen the US Dollar and end the great Oil Bubble speculation and crude oil vigilantes.

But does anyone believe President Bush would give the Bernanke Fed the "green light" to lift interest rates ahead of an election, when US home prices are tumbling?

On May 15th, the most radical inflationist appointed by Bush to the Federal Reserve, Frederic Mishkin, argued that actions such as attempting to prick a price bubble with interest rates should be avoided.

"Just as doctors take the Hippocratic Oath to do no harm, central banks should recognize that trying to prick asset price bubbles using monetary policy is likely to do more harm than good," said Mishkin, who just left the Fed to return to academia.

"Interest rates are too blunt an instrument for targeting sharp rises in specific asset prices."

Mishkin also argued that the Fed should downplay energy price increases, and that the Dollar's devaluation was not a problem. "Fluctuations in exchange rates are something that you have to deal with, but as you know sometimes the media make a huge deal of fluctuations that is way over the top," he said on March 7th.

His speeches built the framework for the Fed policy that is currently being implemented, and has lead to the US economy deep into the "Stagflation" trap, and responsible for the Global "Oil Shock".

But confirming the direction of Fed policy from here, "Rick's contributions to the intellectual underpinnings of monetary policy at the Federal Reserve have been invaluable," Fed chief Ben Bernanke said on May 28th after Mishkin resigned in order to teach his wacky theories at Columbia University.

On the other side of the Atlantic, meantime the soaring food and energy costs are squeezing hard-pressed British consumers more than ever. The government's inflation rate jumped to 3% in April, driven by higher food up 7 per cent and fuel up 9 per cent.

But the average British house is expected to sink by 14 per cent - some £26,000 - in the next 12 months, after falling 5 per cent since the market peaked in August.

Would the Bank of England hike its base rate to strengthen the Pound and combat high oil prices when home prices are tumbling?

Image: A general view of the Sleipner gas platform, about 250 kms off Norway's coast in the North Sea. | Photograph: Sannum-Lauten/AFP/Getty Images