Mercury Rising 鳯女

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If Most Big Economies Worldwide Are In Or Nearing Recessions…

Posted by Phoenix Woman on March 18, 2008

…then why are commodity prices sky-high?

That’s the question Jeffrey Frankel posits while guest blogging at RGE Monitor:

The popular explanation since 2004 has been rapid growth in the world economy. The strongest growth has of course been coming from China and other recently minted manufacturing powerhouses in Asia, but the expansion has been unusually broad-based – including up to last year the United States and even a reinvigorated Europe. So growth has pushed up demand for farm products, energy and other industrial inputs, right?

This reigning explanation now looks suspect. Since last summer the US economy has slowed down noticeably, and is probably entering a recession. Despite talk of decoupling, it is clear that other countries are also slowing down at least to some extent. In its most recent forecast, the IMF World Economic Outlook revised downward the growth rate for virtually every region, including China. The overall global growth rate for 2008 has been marked down by 1.1% (from 5.2 % in July 2007, just before the sub-prime mortgage crisis hit, to 4.1 % as of January 29, 2008). And prospects continue to deteriorate. Yet commodity prices have found their second wind over precisely this period! (Up some 25% or more since August 2007, by a number of indices. So much for the growth explanation.

I suspect that the state of the dollar, weakened by the huge amount of debt, both public and private, our country has taken on under King George W. Bush, is the reason. The weak dollar is why OPEC’s profits, which are figured in dollars, aren’t as big as they seem — and it’s why there’s a big push to move OPEC to the euro instead. Propping up US debt is endangering other countries’ currency as well — and they’re not in a mind to prop us up any more, hence the efforts to “decouple” from our economy. Bush and his buddies were hoping the other countries would wait until after the Bush Gang left town with the spoils from their bust-out, but that’s not happening.

One thing is certain: The brief boost the market got from its archenemy Spitzer’s downfall is soon going to be a distant memory.

3 Responses to “If Most Big Economies Worldwide Are In Or Nearing Recessions…”

  1. Charles II said

    I think Frankel also doesn’t consider that there’s not necessarily a link between commodities demand and growth. When incomes rise, the sort of things people buy changes.

    For example, when incomes rise from $200/year to $400/year, almost all of that will go into food. But when incomes rise from $10,000/year to $20,000/year, people may purchase cars, larger apartments, and so on. There’s a perfectly good reason for oil demand to outstrip other demand: a generation ago in places like Japan and northern China, people kept their houses at 50 degrees in the winter. Now that people are able to heat their houses, you can bet that they’re enjoying a little warmth.

    Frankel’s a very smart guy. But I thought he completely missed the boat on this one.

  2. True. And it occurs to me that while China is in a recession, its people got accustomed to a standard of living that revolved around the use of oil.

  3. Charles II said

    China’s not in recession, just a slowdown. But, on oil, yeah. You wouldn’t believe how uncomfortable it gets to live at 50 degrees.


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