I’m not sure what’s going on in the field of economics journalism, but everyday it now seems, I open a web portal or newspaper and see some economic punditry that actually makes sense. From Caroline Baum’s essays effectively explaining the basics of economic analysis, to Paul Krugman’s (!) brilliant exposition on the Euro zone project, it seems that economic truths are gurgling up everywhere.
One of the motivations for writing this blog is, or was, the dearth of what I felt were capable analyses of economic conditions. The economic and political atmosphere seemed so poisoned by fear of financial Armageddon from late 2008 through late 2010, until objectivity rarely surfaced. But in the past few weeks my motivation to correct analyses or point out overlooked truths has waned. The people who actually get paid for this stuff now seem to be doing their jobs. But I’ll remain ever vigil, especially when the next crisis rolls around, which, according to Mr. McKinnon, is building even now. (McKinnon’s piece ran in today’s Wall Street Journal, but behind the internet pay wall, to which I don’t have access, though I have a paper subscription; which is why quotes from the piece will be decidedly spare–I’ll have to actually type them).
Why is the next crisis building? According to Mr. McKinnon, because of the inflationary monetary policies of the US Federal Reserve. What evidence is there? Like I pointed out a while back (in this posting of November 10, 2010), commodity price increases these days are closely tracking the previous Fed inflationary monetary policies of 2003-2004 when the Fed funds rate was held at 1% for over a year, which ultimately led to a commodities boom that peaked in mid-2008 and busted later that year. Mr. McKinnon points out that general price inflation, i.e., consumer price inflation, in the US only comes with long and variable lags after the inflation-induced commodity price spikes, whereas in our lesser-developed trading partners, it shows up almost immediately. He doesn’t offer a reason for the delay in the US relative to its trading partners, but I will: It’s because demand in the US is static or declining, whereas demand in our less-developed trading partners is growing, and rapidly. China, India and Brazil are all experiencing inflation in excess of 5%, while the US CPI, bouncing along at 1% or less, leaves Bernanke and company sanguine that they can keep printing dollars for so long as they like.
This really ain’t rocket science. It’s fairly straightforward stuff. Yet, the cacophony of market (not economic) journalists attributing the recent commodity price spikes to expanded demand or crimped supply is deafening. And wrong. Supply and demand metrics for basic commodities simply don’t change rapidly enough to warrant price rises of 35% (or falls of the same magnitude or more) in a year’s time.
Internationally, there will soon enough be howls of derision and warnings of impending doom and unrest at the substantial increases in food prices wrought by the spike in food commodity prices. The United Nations recently published its “World Food Situation” report that pegged 2010 as ending the year with the highest food price index in history, just ahead of mid-2008’s. This is to be expected. It reflects next to nothing of restricted food supply or enhanced demand, and virtually everything of a devaluation of the metric (dollars; money) through which the prices are set.
Domestically, the headline price that matters most is the retail price of gasoline, and it is now touching $3/gallon or so. I expect it will exceed $4/gallon before the boom yields to Great Recession part Deux. We’re on the same cycle of boom/bust we’ve been on since at least the end of the Cold War (actually, perhaps since the beginnings of a modern economy in the late 19th century), but both the frequency and the amplitude of the boom/bust wave seems to have lately increased. I stand by my predictions of last year that oil will exceed $100/barrel this year and other commodities (particularly agricultural commodities) will likewise spike and then crash. My guess is still late 2011 to mid-2012 for the crash.
Mr. McKinnon ends his piece in the Journal with a somber tone:
…by ignoring inflationary early warning signs on the dollar standard’s periphery, which in turn lead to rising domestic prices and asset bubbles, the Fed has made both the world and American economies much less stable.