The fi­nite world

Is it spec­u­la­tion run amok? Is it the re­sult of ex­ces­sive money cre­ation, a harbinger of run­away in­fla­tion just around the corner? No and no.

The Pak Banker - - Editorial -

Oil is back above $90 a bar­rel. Cop­per and cot­ton have hit record highs. Wheat and corn prices are way up. Over all, world com­mod­ity prices have risen by a quar­ter in the past six months. Is it spec­u­la­tion run amok? Is it the re­sult of ex­ces­sive money cre­ation, a harbinger of run­away in­fla­tion just around the corner? No and no. What the com­mod­ity mar­kets are telling us is that we're liv­ing in a fi­nite world, in which the rapid growth of emerg­ing economies is plac­ing pres­sure on limited sup­plies of raw ma­te­ri­als, push­ing up their prices. And Amer­ica is, for the most part, just a by­stander in this story.

Some back­ground: The last time the prices of oil and other com­modi­ties were this high, two and a half years ago, many com­men­ta­tors dis­missed the price spike as an aber­ra­tion driven by spec­u­la­tors. And they claimed vin­di­ca­tion when com­mod­ity prices plunged in the sec­ond half of 2008. But that price col­lapse co­in­cided with a se­vere global re­ces­sion, which led to a sharp fall in de­mand for raw ma­te­ri­als. The big test would come when the world econ­omy re­cov­ered. Would raw ma­te­ri­als once again be­come ex­pen­sive?

Well, it still feels like a re­ces­sion in Amer­ica. But thanks to growth in de­vel­op­ing na­tions, world in­dus­trial pro­duc­tion re­cently passed its pre­vi­ous peak - and, sure enough, com­mod­ity prices are surg­ing again.

This doesn't nec­es­sar­ily mean that spec­u­la­tion played no role in 2007-2008. Nor should we re­ject the no­tion that spec­u­la­tion is play­ing some role in cur­rent prices; for ex­am­ple, who is that mys­tery in­vestor who has bought up much of the world's cop­per sup­ply? But the fact that world eco­nomic re­cov­ery has also brought a re­cov­ery in com­mod­ity prices strongly sug­gests that re­cent price fluc­tu­a­tions mainly re­flect fun­da­men­tal fac­tors.

What about com­mod­ity prices as a harbinger of in­fla­tion? Many com­men­ta­tors on the right have been pre­dict­ing for years that the Fed­eral Re­serve, by print­ing lots of money - it's not ac­tu­ally do­ing that, but that's the ac­cu­sa­tion - is set­ting us up for se­vere in­fla­tion. Stagfla­tion is com­ing, de­clared Rep­re­sen­ta­tive Paul Ryan in Fe­bru­ary 2009; Glenn Beck has been warn­ing about im­mi­nent hy­per­in­fla­tion since 2008.

Yet in­fla­tion has re­mained low. What's an in­fla­tion wor­rier to do? One re­sponse has been a pro­lif­er­a­tion of con­spir­acy the­o­ries, of claims that the govern­ment is sup­press­ing the truth about ris­ing prices. But lately many on the right have seized on ris­ing com­mod­ity prices as proof that they were right all along, as a sign of high over­all in­fla­tion just around the corner.

You do have to won­der what these peo­ple were think­ing two years ago, when raw ma­te­rial prices were plung­ing. If the com­mod­ity-price rise of the past six months her­alds run­away in­fla­tion, why didn't the 50 per­cent de­cline in the sec­ond half of 2008 her­ald run­away de­fla­tion?

In­con­sis­tency aside, how­ever, the big prob­lem with those blam­ing the Fed for ris­ing com­mod­ity prices is that they're suf­fer­ing from delu­sions of U.S. eco­nomic grandeur. For com­mod­ity prices are set glob­ally, and what Amer­ica does just isn't that im­por­tant a fac­tor. In par­tic­u­lar, to­day, as in 2007-2008, the pri­mary driv­ing force be­hind ris­ing com­mod­ity prices isn't de­mand from the United States. It's de­mand from China and other emerg­ing economies. As more and more peo­ple in for­merly poor na­tions are en­ter­ing the global mid­dle class, they're be­gin­ning to drive cars and eat meat, plac­ing grow­ing pres­sure on world oil and food sup­plies.

And those sup­plies aren't keep­ing pace. Con­ven­tional oil pro­duc­tion has been flat for four years; in that sense, at least, peak oil has ar­rived. True, al­ter­na­tive sources, like oil from Canada's tar sands, have con­tin­ued to grow. But these al­ter­na­tive sources come at rel­a­tively high cost, both mon­e­tary and en­vi­ron­men­tal.

Also, over the past year, ex­treme weather - es­pe­cially se­vere heat and drought in some im­por­tant agri­cul­tural re­gions - played an im­por­tant role in driv­ing up food prices. And, yes, there's ev­ery rea­son to be­lieve that cli­mate change is mak­ing such weather episodes more com­mon. So what are the im­pli­ca­tions of the re­cent rise in com­mod­ity prices? It is, as I said, a sign that we're liv­ing in a fi­nite world, one in which re­source con­straints are be­com­ing in­creas­ingly bind­ing. This won't bring an end to eco­nomic growth, let alone a de­scent into Mad Max-style col­lapse. It will re­quire that we grad­u­ally change the way we live, adapt­ing our econ­omy and our life­styles to the re­al­ity of more ex­pen­sive re­sources.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.