Monday, March 7, 2011

Pen Meets Paper March7'11

Most mainstream economists and media people seem to have managed to convince themselves that the good times are back: “We are in full recovery mode, just look at all the figures. The curves on all the charts are going up!” Indeed they are, just like they did prior to the 2008 crash in the markets. So, let’s follow the advice of economists and examine some charts and interpret the readings.
With the exception of natural gas, commodity prices have been soaring over the last six months or so. Corn and wheat, for example, have virtually doubled in price ( and the pattern is similar for a lot of other essential commodities, including metals and oils. What this means is that it takes more money to buy whatever is needed for whatever purpose. In other words, each monetary unit has lost value in relation to what it can buy. And that goes for all of the world’s currencies, not just dollars, pounds or whichever. Governments try to hide this fact by selecting figures for inflation calculations based on items whose prices have changed relatively little. This basket of numbers is then used to create their published inflation figures. They are not telling outright lies, they are just spinning the picture for public consumption, making themselves look more competent than they are in controlling inflation in the price of essential commodities.
So, why are prices going up? The reason is quite simple: The availability of cheap money to buy commodities fuels speculation. You can (with the right connections) borrow lots of money at a very low rate of interest, gamble on whether the price will go up (buy long), or down (buy short), and so play in the great world casino. The problem for those of us that buy the commodities off the shelf and actually use them is wild price fluctuations generated by all this gambling. The other downside is that money that should be available to entrepreneurs who provide real goods and services is diverted into the world gambling casino, leaving those that want to do something useful without the means to do so.
That brings us to the present trend of universal price inflation of commodities. More and more credit money is being created right across the world, by central banks and the private banking system. The people that are getting their hot hands on this money are now beginning to loose faith in its enduring value, precisely because they know that the money presses are running hot, creating more of the stuff every day. So, wisely, they figure that commodities, whose volume is limited by physical factors (production capacity, weather, political turmoil (a-la the Middle East at present), etc.) is a better bet than instant fiat money created by the financial system. So they exchange one for the other as fast as they can. Net result: Commodities increase in price, or money is loosing value, depending on your perspective. The big losers are those of us that depend on fixed incomes from wages, salaries, pensions, investments and similar fixed income sources. And that is most of us. For the benefit of a few gamblers that couldn’t care less.

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