Commodity Prices Threaten Economic Recovery

Discussion in 'Economics' started by Debaser82, Jan 12, 2010.

  1. Commodity prices are back on the rampage. That's good. And bad. But more bad than good.

    Having looked vulnerable towards the end of last year, the prices of raw materials are advancing strongly again, signaling a return to global economic health, led by demand from China.

    So what then is the bad news?

    It could well be that commodity prices are being distorted by speculation rather than end demand as investors, notably the Chinese, look for physical stores of value to offset the risk of inflation eroding their wealth. And fast rising commodity prices, particularly oil, hold within themselves the seeds of future economic weakness as they rob American households -- the world's consumers of choice -- of disposable income. To be sure, the money spent on commodities ends up going elsewhere. But the populations of the countries benefiting from stronger commodity prices don't tend to spend as freely as Americans.

    The result is a downer for the U.S. economy and a net drag on the global economy.

    And there's a fairly recent precedent for this glum turn of events: the 2008 oil spike. There are good economic arguments that the surge in oil prices to nearly $150 per barrel by mid-summer 2008 was a significant cause of the global economic collapse by the end of that year, if not quite as big a factor as the financial crisis.

    James Hamilton, a specialist in energy economics at the University of California, San Diego, has argued that the performance of oil prices through the second quarter of 2008 accounted for a sizeable part of the shortfall in real U.S. GDP from trend during 2009 and, crucially, perfectly predicted the economy's trajectory; in other words the bottoming during the summer of 2009 and rebound since.

    So what does his analysis say about the rise in oil prices to 15-month highs this week?

    Well, the more than doubling of oil prices in the past year is clearly taking money out of consumers' pockets. But, so far, it's not quite at critical levels.

    Mr. Hamilton figures the recovery would be derailed once energy consumption accounts for more than 6% of the average American consumer's total expenditure. By October -- the most recent date for which figures are available -- the proportion had reached 5.4%, from a low of 4.7% when the market bottomed. Since that time, oil prices have risen by some $10 a barrel. Which suggests energy expenditure is close to that 6% figure.

    But it's not just oil prices that are rising. So too are food and industrial commodity prices. Set against a backdrop of rising market interest rates and stagnant incomes, it's easy to see how consumers could be forced into another round of belt tightening over the coming months.
  2. heech


    Ironic timing, considering corn was limit down, and soybean/wheat down 3%+ today.
  3. I guess this means economic recovery is back on!:D
  4. The rise in commodity prices has nothing to do with demand from China

    It is a result of distrust to USD, that is all the story behind the rise in gold, oil and other commodities
  5. It must be the speculators' fault. I'm sure it has nothing to do with a ten-fold increase in the US money supply.:)
  6. Money supply did not increase ten fold

    Learn the difference between M1 M2 and M3 and then com here and post again.
  7. According to some, the rise in the commodity prices is just a minor threat to economic recovery. The dangers arise from the possibility that these rises in commodity prices might continue. If that were to happen, then the sharp falls in inflation which have occurred in several Western countries and which have looked set to go further, would go into reverse. That would have two adverse effects. First, it would threaten to increase bond yields, which are already under upward pressure.

    Second, higher inflation would drain purchasing power from Western consumers and companies and consequently cause them to reduce their spending on other items, thereby worsening the recession.
  8. Lethn



    The rise in commodity prices is because of the inflation of currency, people are going to be buying up the valuable stuff. It's like squirrels gathering nuts for winter.

    The commodity prices for the most part are a simple gauge against inflation, look at what happened to gold when the stock markets crashed. If they start crashing again the gold prices are probably going to be the first to react like before.
  9. That's a ridiculous statement. There is no recovery to threaten.
  10. Lethn


    It's the kind of thing Ben Bernanke throws at people when his opponents talk about auditing the federal reserve. Baseless garbage to try and throw people off.
    #10     Jan 21, 2010