Economics - Current Circumstances

[djolds1]

Folks, we use inflation to mean multiple things. This is not inflation in the sense of a wage price spiral. THAT can be fought by monetary policy. You break the cycle of expectations and the fever abates. What is happening now is decades of failure to invest in raw materials causing a secular shift in the terms of trade between resource providers and demand. Monetary policy cannot do squat about that. The resource producers will have more and everyone else will have less until a new equilibrium is reached between supply and demand. So ask yourselves what changed in the past few years. China's rise has been near linear and India's if anything is slowing. The huge raw materials run-up has turned into a financial bubble. As the market absolutists won't attack this on the regulatory side we will live with the costs of their doctrinal purity. I am no lover of Bernanke but he is playing a weak hand as best he can. Financial sector is weak, over leveraged and poorly managed. The market absolutist keep refusing regulatory solutions. He plays cheap money because it is the only card in his hand. Would you prefer he break the bubble with another 1929?

Scott

Duane

[MSimon]

Folks, we use inflation to mean multiple things. This is not inflation in the sense of a wage price spiral. THAT can be fought by monetary policy. You break the cycle of expectations and the fever abates. What is happening now is decades of failure to invest in raw materials causing a secular shift in the terms of trade between resource providers and demand. Monetary policy cannot do squat about that. The resource producers will have more and everyone else will have less until a new equilibrium is reached between supply and demand. So ask yourselves what changed in the past few years. China's rise has been near linear and India's if anything is slowing. The huge raw materials run-up has turned into a financial bubble. As the market absolutists won't attack this on the regulatory side we will live with the costs of their doctrinal purity. I am no lover of Bernanke but he is playing a weak hand as best he can. Financial sector is weak, over leveraged and poorly managed. The market absolutist keep refusing regulatory solutions. He plays cheap money because it is the only card in his hand. Would you prefer he break the bubble with another 1929?

Scott

Duane

I can see the person you quote is not very good at understanding economics. Commodities were underpriced for decades due to excess capacity. Investment is now taking place due to higher prices caused by undercapacity.

It takes time to get the new flows going. There are lags. Three to five years. In some cases ten years. The worst thing the government can do is to get involved.

The way it works is this: by the time government can figure out what laws to pass and what regulations to implement the market is usually about 6 months behind the end of that process. Why is that almost always the case? Because if the government did not implement its solution before the market delivered it would never get the credit.

[MSimon]

And a bubble is just what you want if long term low commodity prices are what interests you.

It will cause overinvestment. Net result - for a few years of pain we get decades of pleasure. Resource companies - not so much.

[TallDave]

Read up sometime on the electric bubble. It makes the Internet bubble look like a passing fancy.

In the early 20th century, anyone who knew the difference between an amp and a volt and could rub two pennies together was building power lines and generators to take advantage of this incredibly useful newfangled thing called electricity. We hugely overinvested in electric production and infrastructure. When the bubble popped and big companies went under, there were Congressional hearings and some people went to jail. But the winners, as in most bubbles, were the consumers.

[djolds1]

I can see the person you quote is not very good at understanding economics. Commodities were underpriced for decades due to excess capacity. Investment is now taking place due to higher prices caused by undercapacity.

It takes time to get the new flows going. There are lags. Three to five years. In some cases ten years. The worst thing the government can do is to get involved.

The way it works is this: by the time government can figure out what laws to pass and what regulations to implement the market is usually about 6 months behind the end of that process. Why is that almost always the case? Because if the government did not implement its solution before the market delivered it would never get the credit.

And a bubble is just what you want if long term low commodity prices are what interests you.

It will cause overinvestment. Net result - for a few years of pain we get decades of pleasure. Resource companies - not so much.

actually a bubble is just what isn't needed. The investing class knows it is a bubble. they do not know what the post bubble price of commodites will be so have a reason not to invest in new production.

Scott

Duane

[MSimon]

I can see the person you quote is not very good at understanding economics. Commodities were underpriced for decades due to excess capacity. Investment is now taking place due to higher prices caused by undercapacity.

It takes time to get the new flows going. There are lags. Three to five years. In some cases ten years. The worst thing the government can do is to get involved.

The way it works is this: by the time government can figure out what laws to pass and what regulations to implement the market is usually about 6 months behind the end of that process. Why is that almost always the case? Because if the government did not implement its solution before the market delivered it would never get the credit.

And a bubble is just what you want if long term low commodity prices are what interests you.

It will cause overinvestment. Net result - for a few years of pain we get decades of pleasure. Resource companies - not so much.

actually a bubble is just what isn't needed. The investing class knows it is a bubble. they do not know what the post bubble price of commodites will be so have a reason not to invest in new production.

Scott

Duane

You know. This makes no sense. If the investing classes know it is a bubble and do not invest then there is no bubble.

Explain to me how you get an investment bubble with no investment?

[djolds1]

You know. This makes no sense. If the investing classes know it is a bubble and do not invest then there is no bubble.

Explain to me how you get an investment bubble with no investment?

No there is a price bubble. At some point it go boom same way housing did, same way dot com stocks did. Now you are making an investment decision. Do you price oil in 2015 at $50? $500? The more uncertain the price the more reason NOT to seriously invest given the boom / bust cycles of raw materials since roughly 1890.

Scott

Duane

[TallDave]

Uncertainty about future prices is why we have futures markets. What's the price of oil going to be in 2015? Someone will sell you a contract at the price they think it will be.

If the futures markets foresee higher prices for a commodity in 2015, you can bet investors are lining up to fund ventures to produce that commodity.

A lot of large companies do "hedges" to guard against variations in currency, etc.