Commodities are going to spike in price until all credits are extinguished (most likely, the credits are not going to be easily extinguished without a fight from CBs). For example, people think that falling housing market will cut the consumption of Copper. In reality, telephone lines laid in Chindia, Generators installed all over the world (like China is supposed to bring one power generation facility a week for the next 7 years) etc are going to consume lot of copper and raw materials. Also, US trade deficit has to adjust as part of the recession. This adjustment necessarily means some jobs are repatriated from Chindia. And this reinstitution of manufacturing facility in US itself will be highly inflationary and consume raw materials. I assume that you are not of the opinion that everything Chindia exports are junk. A significant portion of the trade deficits will have to be made in US as part of the adjustment (i.e some additional manufacturing has to happen in US). Credits will be supplied for this reinstitution of manufacturing facility in US. i.e commodity inflation will continue because of this credit supply (for example it will be through Govt spending). Right now, people are saying residential construction is going to slow a lot in US. In reality, commercial construction in US is providing marginal support. To top it off, Germany is now gearing into high single digit construction boom!! The construction boom is now WILD in second tier cities in India (besides the 4 metropolitan cities). I'm sure, Chindia will try to use up the savings it has hoarded in US bond market - by consuming raw materials. Chindian government are not allowing the high cost to be passed through to the consumers - and hence consumption there is not going to slow immediately with the US housing slow down. Chindian consumption will slow down ONLY when their current savings in US bonds are eroded significantly by consumption!! (Or US govt defaults on those savings). Certainly, wages are increasing in the energy sector. Soon, I anticipate boom in soft commodities (as corn and wheat are now tied to energy than food) and this fueling wage increases in the farm sector. The farm equipment industries are going to boom as idle farm lands are going to converted to corn fields!! If you still dont believe, refer to:
safehaven.com
In the above, look at Grant's article page 9, bottom right paragraph: Oil prices vaulted 71% in 1933-34!! I hope you understand that it was NOT peak oil in 1933!! Also, Jim Rogers says commodity boom started in 1933 (with a blimp in the early part of the recession). I'm not sure, why you are so dogmatic that credit deflation in housing, stocks and bonds necessarily mean all prices and wages fall. Credit is not neutral. i.e in a credit deflation, some prices fall and some prices rise. You are of the opinion that we are in excess in all sector of the economy (i.e money is neutral). We are not in excess for example in commodities sector.
I understand that construction salaries will fall. I agree that, their consumption will fall. That does not mean the Chindians will consume less!! That does not mean the farm equipment, energy sector employees in US will consume less. Also, the wages in the manufacturing sector will start rising as part of the trade deficit adjustments!! This should necessarily happen because more manufacturing jobs and less trained skillset in US implies wages increases in this sector. I believe this is what happened in 1929 and will happen now as well. Essentially, during the boom, hard workers are ripped off and the easy money flippers are rewared. Because of this, lot of people would have moved to the "flippers" environment away from hard workers camp. In the bust, hard workers are rewarded and the flippers are ripped off (i.e credit will be non-neutral again favoring the hard workers this time) and people migrate towards hard workers. This adjustment is what makes the depression very bad. The hard work expected becomes too high!! i.e one will be expected to extract oil from water!! Those who do (like workers in mines, manufacturing) will be rewarded and others will have to invent such productivity in their respective fields(i.e PPI will have to fall faster compared to CPI concept). I believe, in 1929, people feeding Chicken paid more for the feed than what they got in selling chicken. The restaurant that sold chicken dish for less than what they paid for the chicken. The customer who ate at the Chicken at the restaurant probably paid more for the Chicken dish than what he earns!! This is what happened in 1929 credit bust. This mispricing in the depression was not ALL deflation in prices. The Chicken feed prices did not fall fast enough compared to chicken prices and the chicken price did not fall fast enough compared to wages of the customer. If Chicken feeds were made with commodites (say oil), their price will NOT fall until ALL Credits are extinguished. ALL Credits include Govt deficit spending, Fed monitization, Social seciruty, Medicare spending etc.. |
