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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Chip McVickar who wrote (1277)	2/17/1999 10:09:00 AM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 3536

Hi Chip, I apologize for not responding sooner but I was away for a few days. Interesting question regarding deflationary trends in natural resources and farm commodities. You refer to these sectors as having once been a major fabric of our society. True. And we have definitely seen a period of prolonged of deflation. The question is whether this is unusual. A strong argument can be made that the long term trend for all raw materials is to decline in real terms. If you forget about nominal prices in terms of fiat currency and focus instead on purchasing power you will see that there is a pretty strong trend for commodity prices to decrease. This is the result of productivity and technological advances. Yes there are times when prices do rise, but this is in terms of fiat currency. The periods when raw materials prices go up in real terms are generally in response to specific shortages and fairly short term. There was an interesting incident at the height of the last inflation cycle, when oil was being forecast to hit $100 a barrel plus and continue to rise geometricaly. A fairly well known individual, the name is on the tip of my tongue, made a bet with some very serious economists. Under the terms of the bet they were allowed to select a basket of commodities, their choice, and he would bet that over some extended period, ten years I believe, the real price of these commodities would all decline. His argument was that new technologies and productivity would do the trick. At the end of the bet not only were all the selected commodities doen in real terms, they were also down in nominal terms. The point of this is not to say there are no deflationary pressures in the global economy, there clearly are such pressures. The point is that raw material prices are a very poor indicator inasmuch as they almost always trend cheaper in real terms. This is one of the reasons I don't particularly like looking at raw material prices as an inflation indicator nor am I a big believer in backing the currency with hard assets. Henry PS fwiw I would not be surprised to see the Dow test 7400 later this year. But if it happens I think raw material price declines would not be a major cause.