Inflationary Pressures and Commodity Prices

Economics Economics Questions
1

I have a question, and would like to begin a discussion concerning our current economic situation as it relates to inflationary pressures and commodity prices. One could argue that the current indications serve to refute the concept of money supply and inflationary pressures.

My Question is this:
How does one explain the sudden decrease in commodity prices over the past few months, and the strengthening of our dollar, with the current rounds of Fed Reserve infusions (ie: bailouts) into the market?

My thought is that the inflation has not yet been realized yet as the money has not begun circulating through the economy fully due to the credit crisis and the decreasing velocity of money. Or in other words, ‘log jam’.

If this is the case, then when money does start to flow, we could see commodity price increases, and dollar weakening at an even faster rate (in relation to the velocity at which money starts flowing again) than we have prior to these fed infusions.

Is there something else I’m missing?

Thanks

Blake

2

Don’t assume demand is inelastic. Falling prices are the result of a lack of buyers or overproduction. In this case, both.

3

^ Liberty student his the nail on the head. Too many Austrian newbies were thinking that gold would shoot through the roof due to monetary expansion. This simply isn’t the case. When we have a recession, demand falls. Furthermore, banks attempt to shore up their reserves as they’re failing left and right. My best guess it that commodities will go up as soon as our economy begins to grow at a strong rate again. The problem is that we don’t know when this will happen.

4

OK, so I add demand, (or lack therof in the equation), and it makes more sense…Thank you.

So I understand, assuming the same level of demand, and the same velocity of money, then we ‘would’ see commodity prices increase in relation to the infusion of capital by the fed?

The decrease in demand, and the shoring up of reserves (by banks and mattress stuffers alike) actually has offset this infusion in sorts?

one more: What would you say to a fabricated attempt to decrease the price of gold so the government could buy it up cheap in a New Deal type gold confiscation scenario? A tad conspiratorial, but does the fed have the ability to manipulate gold prices in this manner/ or at all? Obviously they control money supply/ value of the USD, but can’t see how they could manipulate gold prices.

Thanks for the informative responses.

5

Sure, that’s the boom. We’re now in the bust. Projects are not starting, they are ending badly. Prices are not going up, they are going down. Demand is not at a high rate, it is falling off as people lose jobs and become more conservative with their finances.

Right. But you have to look at oil relative to the Dow. Or gold relative to the Dow. Have prices really deflated in commodities, or have prices across the board deflated?

The government has no reason to confiscate gold. If they didn’t do it in '71, why would they do it now? The world is not on a gold standard, there is no advantage to seizing gold. In fact, doing so would only reinforce the concept of gold as money.

The physical gold market is still around $1000/ounce. The lesson here is, buy physical gold, not paper certificates. The FED has much bigger problems on it’s hands that duping gold bugs right now.

6

I do not know if this reply of mine is consistent with Austrian theory, but I see a consistency of the current situation with a reallocation of resources truer to the real value. In my opinion, fundamentals of the U.S. compared to fundamentals in Europe do not justify that in less than a decade the value of the euro jumped from $0.85 to $1.60. I do not see the current situation as a strengthening of the U.S. dollar, but rather a market correction toward an equilibrium level. I would see a case for stating that the dollar is strong again if the price of the euro goes back within striking distance to parity, which is still a long way from the current $1.25 exchange rate.

7

Commodity markets have been heavily influenced by leveraged speculation. Rather than blame government for conspiracy, I blame them for failure to provide law enforcement. Regulation has been largely absent. The SEC and CFTC failed to prevent counterfeiting of stock shares by naked shorting and they tolerate the unlimited creation of paper futures and options for commodities. So today the physical market for gold commands large premiums to the paper market and there are shortages at the retail level. But the paper price is suffering from the deleveraging process. We await the obvious arbitrage by fabricators.

The price of oil was bid up and then crashed without creating a glut in storage. The US gasoline storage has been below the low end of the normal range for most of 2008, even with significant demand destruction. The same can be said for wheat, corn, silver et. al. The glut was in the quantity of futures contracts and options. It seems that we could be headed toward shortages with low prices until the real market regains ascendancy over the paper game.

8

So all the money counterfeited by the government made no difference in commodity prices ? The problem is that markets don’t work as they should, unless regulated by the SEC and other bureaucrats ?

9

During a “credit crisis” (stupid term really) such as we are having now, vast quantities of money are actually disappearing as huge numbers of loans being used as money by banks go delinquent. the problem is that that money was already spent on stupid crap such as consumer goods, more crazy loans, pumped into the stock market etc. As valuation return to normal we have deflation. Bernake is printing dollars as fast as he can but it isn’t enough to offset the bubble bursting. But don’t worry, the effects of printing money will actually come through just in time to fuel the next artificial bubble.

10

Yes, markets require regulation and enforcement. Money attracts thieves. Nazgulnarsil answered your first question. Thanks.

11

You’re a candidate to spend more time learning here. Markets are self-regulating. Monopoly government regulation props up big business and corporatism by limiting entry and creating compliance burdens which small firms cannot bear.

Contract enforcement is a must, but regulation is the root of the “thieves” power.

12

Despite new money being created out of thin air, at the moment it is not having an inflationary impact due to the economy “not having full employment of resources”.

13

You are right, at the moment. However once there is some sort of stabilization of markets that lagged impact could be felt.

14

“Markets are self-regulating” Perhaps in classroom theoretical discussions this is accepted, but certainly nowhere else. Every game has rules and most require umpires or referees. Where vast amounts of wealth are concentrated, sophisticated rules and enforcement are required. The stock, bond and commodity markets have achieved a level of complexity that require books of regulations that go well beyond contract enforcement.

I would like to learn more. My original search was for an Austrian school definition of money. Somehow I arrived here. I trade stocks and commodities for a living so the lead question was of interest. I’ll rummage around in the archives for a while and see what I can find.

15

To learn about the dangerous path that regulation leads to, please read Mises’s excellent analysis.

Middle-of-the-Road Policy Leads to Socialism

Regulations are dangerous because they breed more regulation, reduce the incentive for private parties to perform due diligence, and lead to moral hazard and ultimately socialism of either the left or right variety.

16

Perhaps learn first, if only to avoid making question-begging assertions.

-Jon

17

Well said, although I have had the damndest time getting through to people in the financial industry. They cannot fathom a paradigm shift.

18

It is easy to say “the game has rules, and therefore needs referees.” But in all honesty, as Keynes himself points out, businessmen are not as immoral as politicians. The referees who are regulating the economic game have a stake in the outcome, which is a ludicrous moral hazard, especially with the knowledge that markets are self-regulating. Businessmen, who are single-minded in their desire for success, must be left to their own devices on how best to satisfy the customer. Those who manage to offer the required good or service of the highest quality, and at the lowest cost, will prosper. Those who fail to satisfy the customer efficiently will fail, and their resources will be allocated to a competitor.

As far as comodities maintaining their prices, we have not yet entered the “hyperinflation” warned of by free-market experts (like Peter Schiff). Once the FED has exhausted all stimulus possibilities, then the value of the Dollar will plummet, and prices will soar.

Some key markets are currently being flooded. Oil and Gold, for example. While demand for gold has risen dramatically in the last 2 months, the price has been relatively stable. It was puzzling at first, but after some research I found that the market was being flooded (by banks, governments, and other large holding entities in order to satisy large demands for cash) with a greater rate of supply than the increase in demand. As a result, gold prices have fluctuated only moderatly. While several mints have depleted their stock of gold coins (eagles, leafs, krugerands) due to increased demand, many bullion, re-sellers, and collectors outlets have been swamped, both with large quantity selloffs, and small purchases.

When the sell-off of commodities comes to a close due to depleted stores, and the FED is left with no option but to inflate, then the increased demand will trigger an increase in prices. This will signal the panic that we all know is coming, the spike in prices, and the collapse of the dollar.