I can not provide any evidence, but I think that we are in commodities scarcity COMPARED to the amount of "CREDIT" that is created. If the credit deflation is allowed to continue (once the bust starts) without the govt pumping up the credit (like "New Deal"), then the commodities market will be in surplus/excess and their prices will fall. I think it is the govt's interventionist policies that jack up the prices of commodities by creating excessive demand for them. In the 1930s, the new deal injected money into raw material usage (like Hoover dam, Tennesse Valley project etc). In the current bust that is going to happen, I think, Chindia/japan/US Govt will drive up the demand for raw materials excessively beyond the FREE market's supply/demand characteristics. I think, commodities market will soar because of this interventionist policy ALONE and NOT because of Free Market demand. And this is what is going to cause more misery to people.
Both in 1820s (After Thomas Jefferson closed US bank/CB) and 1870s (After Lincoln stopped inflating currency after the civil war), deflation took hold across all spectrum of goods. During the civil war, because lot of money was printed for war effort, all this money started real estate (farm) Boom in midwest. The 1870s deflation (called as great depression until 1930s) lasted 15 years!!! James Grant had an article on this while ago on his website. In both these deflation, prices fell rapidly including commodities (it was mostly a commodities economy at that time) and govt was non-interventionist (there was lot of demand by public to inflate the currency as per Grant's article). But, in 1930s, commodities did not deflate relative to the assets (like steel fell only 15% because Govt was providing price support as well as investing in New Deal construction programs). Actually, in UK pound, commodities actually saw price rises because pound had fallen against gold more than commodites have fallen against gold (i,e US Dollar as dollar was pseudo linked to gold then).
The "New Deal" was actually making the deflation worse by creating "pseudo inflation". Today, I think, the world is entrenched with the view that, govt should be extremely interventionist and ONLY because of that I think commodities will go up in price!! If Chindians wanted better life, they better work hard for it. Instead, they will all expect their govt to "intervene" hard for them.
BTW, have you noticed that both James Grant and Doug Noland always talk about credit bust and refer to 1930s BUT talk about higher inflation getting entrenched in the market? Ofcourse, todays wage increases are all the strong foundation for the depression. I still think the growing credit bubble will keep the CPI inflation higher for some more time (maybe 5-6 quarters) even if the housing market cracks on the margin. Only a credit bust will start lowering CPI (I'm referring to CPI by DOL, however, the actual living cost might not fall much. I feel CPI by DOL includes all junks that are not essential for living). |
