Why should commodities inflate in the long term? Let me give you some arguments against such inflation:
Farm productivity is increasing by leaps and bounds around the world. For example, in South America, especially Brazil, huge areas that are only now being affected by the green revolution. The sudden increase in China's demand caught the world by surprise, but there is no reason the new demand cannot be satisfied at low prices in the not too distant future. Also, there is a lot of talk of getting rid of agricultural subsidies in Europe and the US, which will result in a big increase in agricultural production in Africa.
As countries such as India and China join the developed world, fertility drops and population stops increasing. China's population is projected to stabilize and start decreasing in the not too distant future. Europe's population, is already going down, if you subtract immigration. Brazil's fertility rate has dropped precipitously in the last few years and is now at replacement levels. And so on. That does not bode well for commodity demand. Commodities may not escape the general deflationary trend.
In the last couple of decades energy research has stagnated, in the face of cheap oil and myopic politicians and electorates. This is changing rapidly in view of peak oil. This time may be different. A massive commitment to nuclear power, along with hefty taxes on oil and gas use (nothing more than Europeans and Japanese are already paying) can reduce US oil demand drastically -- just like it happened after the seventies oil shocks.
Finally, throughout the world, GDP is increasingly shifting from industrial high energy content goods, to services and high intellectual content goods with little energy content. Ultra cheap communications make commuting to work and traveling for business meetings increasingly obsolete. Our dependence on heavy use of energy to do our work is rapidly diminishing. When the basic physical needs of the newly industrializing populations of Asia and Latin America are taken care off, commodities will suffer a horrendous crash.
I doubt the commodity boom will last beyond the end of this decade. |
