It didn’t take long for Congress to make an emphatic point that it does not understand the value of a free market, or for that matter, that it fails to comprehend the importance of a freely operating pricing mechanism. Said another way, Congress is proving its members to be the economic jackasses they’ve generally always tended to be. In this case, some are attempting to disrupt the free flow of dollars into commodities — the same dollars whose supply were expanded at a decent clip over the last few decades.
The attempt at preventing the market place from determining the real price of commodities as dollars flood from other, bloated priced items — real estate and related securities, financial equities, and less attractive, low interest rate debt — and into real, hard, tangible assets that are forced to be backed by labor and sacrifice as opposed the Wall Street alchemy, Ponzi finance, and the money printing press. Robert Mugabe’s inflation in Zimbabwe clearly is far more dramatic abuse of a currency, but his policies to hide inflation are fundamentally no different. He attempts to prevent price discovery as well, and the consequences he has will be what the U.S. can expect — earlier stages, of course, but dramatic nonetheless: capital shifting to where it can find a true price vs. being hampered by centralized cover-up.
Yesterday Bloomberg began reporting that the Chairman of the Senate oversight committee, Joseph Lieberman, is considering legislation limiting what he defines as speculation in the commodities markets. While it is geared at preventing mostly larger players — hedge funds, and other institutional investors — from hedging in the commodities market, the effects of this proposal, should it be enacted, will cause shudders all the way down to the average person.
Mind you, we’ve been pointing out since the early part of this decade that Greenspan’s attempts at warding off the market crash and ensuing recession of 2001 would create severe dislocations in the economy as prices bubbled into new bubbles and economic activity would be distorted as the all elements of the economy restructured itself around what it perceived to be legitimate economic growth. Yet we were clear that this activity would serve only as a head-fake to the economy given it was rooted not in genuine growth, but rather through credit and monetary inflation — a process that rips wealth from the organic / functioning sections of the economy, reallocating it to the hot money, synthetic areas of the economy that can’t stand on their own absent the artificially created life support. With the collapse of the housing and credit markets, we’ve been proven about as correct as one can be — especially when compared to the supposedly reliable experts on Wall Street, at the Fed, and in Washington D.C. who were overwhelmingly blindsided by the collapse.
Says Lieberman:
“We may need to limit the opportunity people have to maximize their profits because a lot of the rest of us are paying through the nose, including some who can’t afford it.”
Meanwhile, Senator Claire McCaskill, Democrat of Missouri, is warning that the people are ready to reach for the Pitchforks. Well, let’s make sure they know who the real culprits are. In short summary, here’s a few key reason why commodities are going up:
- Too much money has been printed over the last few decades. The consequences of this were beneficial as they often are when the government and its sanctioned central banks (ala our Federal Reserve) inflate in the early stages in that some “nice” assets were inflated in price, such as stocks and bonds, and houses. Only, investors failed to make the connection that these bubbles, with bonds still in high gear, were inflationary.
- The other benefit was a double edged sword: free trade. While many lost there older, higher paying jobs in the United States, most Americans were only mildly inconvenienced as newly minted dollars were quickly vented off shore with the trade deficit. All that wealth was invested by foreigners into vastly expanding low cost production capacity, and hence, the U.S. consumer benefitted as prices plummeted. Were these dollars stuck in the United States, its high cost labor and cumbersome regulatory nonsense would have combined with the natural consequence of an increasing money supply facing a supply of goods and services growing at a dramatically slower pace. Inflation would have strangled the economy pretty quickly.
- All this foreign production and accumulation of wealth requires commodities to feed it. That demand is competing with the U.S. as supply has not increased so drmatically. Flush with U.S. dollars, trade partners are ever more willing to part with dollars to satiate their demand for commodities.
- All those dollars are printed, and they exist in the economies of many countries across the globe. Most still remain invested in the Bond bubble, focusing heavily in the perceived safety of U.S. Treasuries. However, other U.S. bond assets, especially the once sturdy mortgage sector has imploded. This, as commodities were gaining pretty much since 2002. Since then, Sovereign State and Central Bank investors have been contemplating the problems of the dollar, and have begun braodening their positioning of new dollars in areas other than just bonds and equities. Hello, commodities as an asset class.
- More private and institutional Investors have been looking to diversify as well, with the most savvy having understood the nature of the inflation that took place over the last twenty years and its contribution to a vast credit bubble that will require yet more inflation to support Wall Street investment banks. They’ve also noticed the U.S. government has a long term insolvency problem given politicians have promised the sun, moon, and stars at such a level that it will literally bankrupt the nation, and with that they expect politicians to to the politically surreptitious method of paying off things like Social Security, Medicare and Medicaid. They’ll do it with freshly printed dollars vs. doubling taxes and cutting benefits by a third. These savvy investors have diversified into commodities as a basic inflation hedge given they believe the die were long ago cast.
- Other savvy investors expect foreign sovereigns to lose their appetite for U.S. debt at near 50 year low yields given they expect the emerging recession will be severe. This will result in more commodity hedging / dumping of the dollar, they expect. F
- or decades we exported our inflation, and foreign nations gladly imported it for trade purposes. Now we will pay for it as foreigners slowly export it back to us.
- Finally, Peak Oil theory has been right on, and this problem of decreasing light sweed crude supply means oil producers will be forced to retrieve harder to get and less easily refined resources vs. what so easily flowed for the past sixty years. The quality of Saudi oil has been steadily decreasing suggesting that the Saudis are not so flush as in the past, further explaining their recent shift to preserve their resource for future generations of their own people (a trend emergin among all OPEC nations) vs. supplying the United States, which refuses to develop its own resources while it’s politicians, delusional as always, wag their fingers at the OPEC for not producing enough.
- U.S. energy policy has been swamped by Green and NIMBY (not in my back yard) legislation that simply has caught up with the U.S. via higher priced energy. Oil is a crucial factor in the production of everything, including fertilizer, transportation, and every single facet of production. As it goes up in price, invariably so will all else. Nuclear energy has been virtually outlawed while many nations globally use it very safely. Meanwhile, alternative energy has been a goal, but its still not viable technology. NIMBY and environmental legislation hammers some of it, such as wind farms, which have been prohibited for killing some birds and making unsightly beach views.
- Just in Time Delivery was dependent on low energy costs. Supply will be constrained as the economy rewires itself to slower delivery and larger inventories in order to lower costs.
So there you have it, and that’s just the tip of the iceberg. Congress can reshuffle the deck chairs and search to blame, blame, blame everyone but themselves and the private banking cartell they collude with called the Federal Reserve. But inflation is catching up to us, and it the stupid legislation in the United States that made the U.S. too complicated for doing business, and its currency so common, well… that’s to blame.
That said, expect the politicians to distract from the real problems as they always do. They will, instead, look for politically popular scapegoats to help their re-election.
