Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

US Economy, Commodity Prices and the Trade Cycle

Economics / US Economy Apr 07, 2008 - 08:43 AM GMT

By: Gerard_Jackson

Economics The current economic situation brings to mind 1999 when worries about the state of the US economy were piling up faster than rationalisations about the country's alleged growth rate. There was less talk of a "new era" economy and more about a "correction". What was it that brought about a more subdued assessment in so many quarters? Commodity prices are the answer.


The problem with commodity prices is not their price falls but the squeezing of their price margins, the difference between costs and prices. This is an important signal to look for yet, like the Titanic's SOS, no one seemed to have been listening. It's the same old problem of not seeing the trees because of the wood. And in this instance, price margins were the trees.

We witnessed mood swings from overvalued stock to falling commodity prices and back again. First, so we were told, the former could burst and send the economy into recession; on the other hand, a continuing fall in commodity prices would tip the world into a global recession. Well, which one was it? Neither, is the answer. Falling commodity prices can no more cause a recession than falling share prices can. And yet the two are closely linked just as some clusters of mergers are. In economics, everything is connected to everything else and prices are the means by which this is accomplished.

Distort prices and you discoordinate the whole economic process. This, unfortunately, is precisely what the Fed did, and still is doing. What is equally unfortunate is that the vast majority of economic and financial commentators are totally oblivious to this fact. Loose monetary policy fuelled Clinton's stock market boom and fuelled corporate mergers while having a malign influence on commodity price margins. Commodities are inputs. As I explained in previous articles, artificially lowering the rate of interest causes over-expansion in higher stages of production.

Commodities are part and parcel of those stages, meaning that lower interest rates also raise the demand for commodities, even though their secular price trend is downward. Once the higher stages find themselves in a profits squeeze as rising costs and falling demand puts them in a financial vice, this will feed back into a reduced demand for these products which in turn reduces their price margins. This is why commodity price margins rather than commodity price trends should be followed more closely*.

But where do mergers enter the field? Two periods in American economic history throw considerable light, at least in my opinion, on "corporate mega-mergers". Readers will recall that I have referred several times to the 1920s economic "new era". But the boom of 1896 to 1903 was also very much a "new era" phenomenon. Now 1924 to1929 was characterised by considerable take-over activity, just as the 1899-1902 period was.

These "new eras" were marked by 'cheap credit' and feverish stock market activity. With ample credit available and stocks rapidly rising it becomes easier to issue abundant securities, which made it easier to buy out other companies and consolidate holdings. Once again, it is what fuels the action that counts rather than the action itself. Each era of considerable merger activity was fuelled by credit expansion.

Like the rest of the world, America is going through not a business cycle but a cycle of ignorance. The belief that the so-called business cycle is a natural and unfortunate feature of market economies is so ingrained that it is rarely questioned. For nearly 2000 years Aristotle's assertion that heavier objects fall faster than lighter objects held sway over the European mind. Then one day Galileo completely demolished Aristotle by simultaneously dropping from the top of the Tower of Pizza objects of different weights.

Regrettably it is not as easy to refute the fundamental belief that the trade cycle is a sad by-product of capitalism, especially since the birth of Keynesianism. But until we do our economies will continue to undergo periodic booms and depressions. Even though the Austrian School of economics has provided an analytical refutation of Keynesianism it has yet to receive the recognition it deserves. This means that we shall continue to suffer the consequences of the public's economic ignorance.

*This does not mean that commodity prices always rise during a boom. After WW I commodity prices were depressed despite the post-war booms The reason is that the war had created an excess supply that that took years to balance out. On the other hand, current booms in China, the US, India have driven up commodity prices.

One must also consider a situation in which improved technology could keep commodity prices stable even as demand increased significantly. In the absence of a rise in demand commodity prices would have risen. We can therefore say that the difference between the boom price and the price that would have otherwise prevailed amounts to an increased prices for commodities.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

Gerard Jackson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in