Monday, September 27, 2010

Commodities reach new all-time highs

It's official: the CRB Spot Commodities Index today reached a new all-time high (485), eclipsing the previous high (481) set in July 2008. This can be interpreted in many ways, of course, but let me state the obvious: this is not a symptom of deflation, and this is not a precursor of a double-dip recession. This is unambiguously symptomatic of growth and accommodative monetary policy.

What is amazing to me is that the Fed and so many commentators persist in wringing their hands over the possibility of deflation and a weakening of economic growth when commodity prices continue to move to all-time highs almost every day. I have yet to see anyone come up with a coherent explanation as to how we can be on the verge of deflation and recession when commodity prices are making new highs almost daily.

Commodity prices are measured in virtual real-time. They lie at the intersection of supply and demand across markets around the world. They tell us at the very least that economic activity is not contracting, it is expanding; that the price level is not declining, it is more likely increasing. Commodity prices are not subject to faulty seasonal adjustments, and they are not subject to revision. They are the here and now, and they are booming. And they are being led by gold, which is also at new all-time nominal highs.


Unknown said...

This is a wild and baseless assertion, to make the claim that all is well because commodity prices are increasing...

Did they not do the exact same well into the summer of 2008 just as the globe was about to melt-down into financial chaos?

Since you know the answer is 'yes', drawing such optimistic and blanket conclusions is very dangerous, like most of your advice on the site is.

Frozen in the North said...

Summer of 2008 as a sign that everything is all right? Strange call. Funny enough oil is trading in the 75-79 range, and is slightly off (YoY). I would venture that investors in many part of the world (and I mean China here) are looking at commodities as a store of value.

The one item that doesn't seem to fit the mold in oil... considering the weakness of the US dollar.

Mike Eliason said...

I don't think he's making the argument that there are no problems with the economy. He's making the argument that there is no risk of a deflationary spiral -- monetary policy is accomodative and there isn't any evidence of deflation in commodity prices or any of the tradtional measures of price levels (like the CPI). If there are risks to growth, it's more like 1970s stagflation rather than a 1930s deflationary mess.

Benjamin Cole said...


The answer is obvious--Japan has had deflation, on and off (on again) for 20 years. Right now they have deflation in Japan.

Ergo, large economies can experience deflation concurrent to some inflation in global commodties markets.

Especially after a real estate depression, and weak aggregate demand--like the Japan and USA.

Why is this so mysterious?

Benjamin Cole said...

Also, remember, the Boskin Commission (echoed by Milton Friedman) found that the CPI overstates inflation, perhaps even by as much as 1 percent. A recent American Economic Review paper echoed this finding.

We may be in deflation now.

Buddy R Pacifico said...

Benji's "we may have deflation now" remark brings to mind this chart by Scott Grannis that shows both inflation and deflation! If consumer good prices go up with stronger commodity prices and weaker dollar then both goods and services climb.

Public Library said...


Why are you amazed at Bernanke's view of the world? This is the same guy that completely botched the call on the housing market and banking system.

I'm surprised you still have faith in a board of 10 or so men/women to effectively manage a $12T economy by simply printing more paper year after year.

There is ample evidence to suggest the Federal Reserve is part of the problem. Yet year after year indoctrinated economists explain away this possibility because it is the fundamental root of their analysis.

All is definitely not well in the Global economy and Central bankers are 'central' to the problem. Pun intended. Expect the ride to get steeper along with more than occasional free-falls here and there.

Public Library said...


"As long as the Fed keeps printing and academia keeps rolling out new theories, the cleansing of the multiple booms created by Fed interventions will continue for years. Those operating in the here and now of the real world have figured out that they should be deleveraging and saving. That may be interpreted by policy makers as doom and gloom, but it's just good sense."

"Put On a Happy Face?"

marmico said...

Yep, rosin and lard are at record highs. I wonder if global trade in burlap and tallow dominates the energy complex. LOL

Benjamin Cole said...

It is always amazing to me who actually buys gold. Evidently, Indian jewelry buyers. Other odd countries pop up as major buyers of gold, including Turkey(explain that, anyone).

"World’s top 10 buyers of gold

The average global demand for gold in the past 10 years has been mainly for jewellery at 76 per cent, followed by industrial applications of 14 per cent and 10 per cent for investors....

The craze for the yellow metal in India is phenomenal. It has traditionally been the world’s largest consumer of gold. India buys an average of 800 tonnes of gold every year and its total jewellery market is worth more than $20 billion.

However, in recent times the demand for gold in India has waned slightly, with the price of the precious metal zooming to record highs. Yet, the country remains the largest buyer of gold, at 770 tonnes in 2007.

China: 2nd largest buyer; number one producer

China produced 280.5 tons of gold in 2007, making it the world’s number one producer of the precious metal.

USA: 3rd largest buyer; 4th largest producer.

The United States of America is the world’s third highest buyer of gold. In 2007, it purchased 275 tons of the yellow metal.

However, the US is also the world’s fourth largest producer of gold. In 2007, it produced 240 tons of gold.

Turkey: 4th largest buyer

Turkey is the world’s fourth largest buyer of gold. In 2007, it bought 250 tons of the precious metal.

Saudi Arabia: 5th largest buyer

UAE: 6th largest buyer

The United Arab Emirates is the sixth largest gold-buyer at 107.2 tons (figures pertain to 2007).

Russia: 7th largest buyer; 6th largest producer
In 2007, Moscow procured 85.6 tons of gold.

Russia is also a big producer of gold. In fact, it is the world’s sixth largest gold-producer. In 2007, it produced 169.2 tons of gold.

Vietnam: 8th largest buyer !!! Vietnam???

Vietnam bought 77.5 tons of gold in 2007, making it the world’s eighth largest gold-buyer.

Egypt: 9th largest buyer (Egypt????)

So Vietnamese buy one-quarter as much gold as Americans. Turks buy about as much as Americans. All are dwarfed by Indians and Chinese.

What to make of this?

Really, I suspect gold prices have nothing to do with Fed policy, or the US inflation rate, expected or otherwise.

Gold prices might be affected by the Indian central bank...jeez, I know zilch about that oprganization. Does anybody?

marmico said...

Peak gold, not plastics, wool or sugar Benji!

Benjamin Cole said...

Peak gold?

Maybe so.

Or those Turks fear inflation.

marmico said...

Or those Turks fear inflation.

Don't think so.


Benjamin Cole said...


That is an interesting story. There are also reports of Indian demand for gold tapering off.

That could mean we are building into a glut--what will the inflation-worriers do if gold starts to go back down?

Gold, of course, has been a rotten investment for years at a stretch, notably after its peak in the 1980s.

We are still down from that peak, adjusted for inflation.

Benjamin Cole said...

27 August 2010

Japan's struggle with deflation worsens as prices fall

Consumers hunting for bargains in Japanese shopping centres have seen months of falling prices Japan's core consumer prices index fell for the 17th month in a row in July, underlining the country's entrenched problems with deflation.

The index, which excludes fresh food, fell 1.1% from July last year.

Deflation is adding to economic worries in Japan, where the strong yen is making exports more expensive.

Wow. 17 months of deflation--right into the teeth of rising commodities prices.

How does anyone explain that?

Scott Grannis said...

Re: Japan's deflation. Note a very important difference between Japan and the U.S.: the Japanese yen has been rising against virtually all currencies for years, whereas the dollar has been falling. Very strong currencies reflect very tight monetary policy. Very weak currencies the opposite, which is why weak currencies and rising inflation go hand in hand.