Home > Uncategorized > Signs of the Commodity Bust

Signs of the Commodity Bust

Cotton Prices Fall.  I think this is the beginning of the backlash from the inflated commodity prices we have seen following the global monetary uber-stimulus over the past 3 years.  Notice that “China, the world’s largest cotton consumer, reported a 32% year-on-year drop in its cotton imports in June, confirming market fears over weak demand.”  China (along with many other countries) has been talking about tightening monetary policy recently, this is the likely result of that.

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  1. W. Knowlton
    July 29, 2011 at 2:45 pm

    Can you elaborate a bit about how this is the result of tightening monetary policy?

  2. Free Radical
    July 29, 2011 at 4:46 pm

    Step 1: Set inflation expectations high and interest rates low.
    Step 2: Borrowing goes up (money supply increases).
    Step 3: Inflation rate increases
    Step 4: Debts must be repaid (with interest). Money supply shrinks
    Step 5: Inflation rate decreases
    Step 6: lower inflation decreases borrowing which causes money supply to decrease more (or increase less) causing more deflation etc.

    Cotton prices rose (step 3) and now they’re falling (step 5), I suspect other commodity prices will follow. We’ll see….

  3. Free Radical
    July 29, 2011 at 4:47 pm

    Oh, if you tighten monetary policy in the middle you just hasten the onset of steps 5 and 6. This is basically the orthodox story of what happened during the great depression, which is true but in my view they were just heading off the contraction that was inevitable at some point anyway.

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