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High commodity prices
Guillermo Calvo writes:
Incentives to stockpile commodities stem from the combination of low central bank interest rates (especially in the US) and the growth in sovereign wealth funds. The latter, in my view, is the crucial factor. Sovereign wealth funds have been created partly with the intent of switching the composition of government wealth from highly liquid but low-return assets to more risky but much more profitable investment projects. Thus, their attempt to get rid of excess liquidity resembles the econ 101 exercise in which the student is asked to trace the effects of a portfolio switch away from money and into capital. The answer is – of course – higher prices.
The piece is interesting throughout, hat tip to Mark Thoma.
Posted by Tyler Cowen on June 20, 2008 at 08:22 AM in Economics | Permalink
Comments
And if only they deregulated the ipod market, everyone in Africa would have an ipod right now!
Posted by: sm at Jun 20, 2008 9:59:46 AM
I remain unconvinced. As he attests, speculation can only raise food prices without increasing stockpiles if demand for food prices are completely inelastic, and for that to happen you would need the starving of the world to be able to outbid the speculators, which doesn't sound too reasonable. And if that's what is in fact going on, then there's no reason to worry about high food prices causing hunger. Is there a more plausible way to blame this on speculators?
Posted by: bb at Jun 20, 2008 10:54:14 AM
I find this hard to blame on speculators as well. I think sometimes speculators can prop up a market but this does not seem to be one of those times to me. Mainly because Cash is high and stocks are low.
I find the argument presented interesting. If I understand the process it is not really about speculation but about inflation.
So this is the argument as I see it from the article
SWF sell treasuries and buy iliqiquid investiments to increase return because of low and risky US rates.
Fed targets interest rates so they must buy treasuries from SWF to keep rates constant.
This injects money into the system bidding up commodities and lowering dollar.
So at the end of the day Oil prices are going up because of increasing money or inflation.
Posted by: eccdogg at Jun 20, 2008 11:16:02 AM
Above it should read "demand for food is completely inelastic", not "for food prices".
Posted by: bb at Jun 20, 2008 11:40:51 AM
Doesn't higher prices result from currency inflation due to - or caused by lower interest rates? If my money is worth less due to currency inflation then the store owner will raise prices to recoup losses from my devalued currency.
I believe that this is a simpler and more realistic reason for inflation. Sovereign funds are mearly measures to recoup losses.
Posted by: kevin at Jun 20, 2008 2:06:26 PM
This the most nebulous thing ever. A switch away from money into capital. Is he talking about physical capital? Financial capital? Prices rise? What is he talking about? General prices? The prices of commmodities? The price of "capital"?
Posted by: steve at Jun 20, 2008 2:50:17 PM
Except risky assets are getting crushed. This argument sounds just like the savings glut, everyone is searching for yield, the risk premium is absurdly low story pre credit crunch. Except that we know overall, market de-leveraging and risk re-pricing is causing money move from risky assets to clean assets.
More importantly, this might explain why commodities are rising, but it would also suggest that all (risky capital) assets should be rising as well. But they aren't.
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we will not afford the money for the things
Posted by: tom at May 14, 2009 12:59:20 AM
Is it realistic?
Posted by: danna at May 14, 2009 12:59:49 AM
It seems we will be in economy ression for quite a long time. We can see the economy crisis effect everywhere.
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