Commodity recap

With the future of mankind supposedly hanging by a Eurozone sovereign debt thread, paying attention to anything other than the political struggles in Europe to avoid default would seem silly. But since the damage has already been done, all we are witnessing these days is a game of financial musical chairs: who will be the unfortunate holder of PIIGS debt once it is eventually restructured? The economic losses have already occurred, since the PIIGS spent their borrowed money in very inefficient and non-productive ways. Debt defaults occur all the time, and they needn't imply the end of the world as we know it, even if they are huge. That's mainly because a debt default does not destroy demand, it simply makes lenders poorer and borrowers less poor—debt is a zero-sum game. But meanwhile there is no reason why a combination of defaults—surely Greece will default on a significant portion of its debt—restructurings, and more prudent fiscal policies couldn't allow the global financial markets to avoid a total collapse. And if the fiscal policy changes are growth-favorable (e.g., they avoid higher tax rates, and focus instead on flattening the tax code and cutting back on the size of spending relative to GDP), the global economy might even emerge from this mess in better shape.

So while we wait for the music to stop to find out who the winners and losers are, it might be worthwhile to review the action in the commodity markets.

Crude oil still trades at about two-thirds of what it briefly was worth in mid-2008, but it is still orders of magnitude more expensive than it was 12 years ago.

In constant dollar terms, crude is worth about 15% more today than it was in the early 1980s.

But we spend about one-third less for energy today than we did in the early 1980s, thanks to huge gains in energy efficiency. So on balance, energy prices do not represent an unprecedented burden on the economy.

Non-energy spot commodity prices are down 16% from their April '11 highs, but are still way above the levels that prevailed throughout the 1980s and 1990s.

Copper prices are about 25% off their highs, but still way above the levels of 10 years ago.

The problems in Europe may well have taken some of the edge off commodity prices, but by just about any measure, commodity prices are still relatively high. I think that reflects the fact that a) global demand remains sturdy, and b) monetary policy at most central banks remains very accommodative. I fail to find any sign in the commodity markets of a significant deterioration in the underlying economic fundamentals.