Don't Blame The Fed

Generali

There is a widely held view that The Federal Reserve and other Central banks printing money has been responsible for commodity prices increasing.

This website has mapped commodity prices (excluding energy eg coal, oil and gas) against worldwide industrial output:



So who's to blame for high prices, The Fed or emerging countries finally starting to emerge as economies?

gagahouse

Generali wrote: »

There is a widely held view that The Federal Reserve and other Central banks printing money has been responsible for commodity prices increasing.

This website has mapped commodity prices (excluding energy eg coal, oil and gas) against worldwide industrial output:



So who's to blame for high prices, The Fed or emerging countries finally starting to emerge as economies?

Between 1980 and 2000 industrial production increased yet the CRB went down, what happened then?

The chart is a bit misleading, the scales are different - from the comments below the article

tinbox said...
I think it's fair to say that our host, MT, posted this chart as support for the view that the US Fed/Treasury are not causing the recent observed commodity price rises. With the cherry-picked time frame and grossly mismatched scales, I think the crowd isn't buying it.

So industrial production went up 40% since 2000 but the CRB is up 175%, I'm not convinced by that chart.

mbga9pgf

Chicken and the egg, which comes first, price rises or industrial production.

I think derivatives and etfs have a lot to answer for, particularly when it comes to volatility in pricing.

CLAPTON

if the world's money supply was fixed, would average prices have risen?

Generali

CLAPTON wrote: »

if the world's money supply was fixed, would average prices have risen?

No, they'd probably have fallen along with nominal wages.

It's impossible to fix the money supply mind, even under a Gold Standard or similar as you can't fix velocity of circulation. Economists pretend velocity is fixed because it's too complicated if you don't but I think that's wrong.

CLAPTON

Generali wrote: »

No, they'd probably have fallen along with nominal wages.

It's impossible to fix the money supply mind, even under a Gold Standard or similar as you can't fix velocity of circulation. Economists pretend velocity is fixed because it's too complicated if you don't but I think that's wrong.

money supply and velocity of circulation are distinct concepts.

both can affect the average price of goods & services but it likely that the large scale inflation we are now seeing is a result of the increase in money supply (QE)

Generali

CLAPTON wrote: »

money supply and velocity of circulation are distinct concepts.

No they're not.

The money supply is defined as MV = PT

• M is the money stock, the amount of money available in the economy for transactions.
• V is the velocity of circulation. The velocity of circulation refers to the number of times the stock of money changes hands in purchasing transactions over a period of time
• P is the price level
• T is the number of transactions

QE increases the stock of money (M) but as lending has fallen, V is falling. Overall, in the UK at least, MV is roughly static or even falling slightly. You can see this in the M4 measure of the money supply produced by the Bank of England:

http://www.bankofengland.co.uk/statistics/fm4/current/index.htm

purch

There is a widely held view that The Federal Reserve and other Central banks printing money has been responsible for commodity prices increasing.

Only by the kneejerk brigade.

The prices of those commodity's that are non-exchange traded, and therefore not open to speculation, have risen just as much, and in some cases more than those commodity's which are exchange traded.

Certainly some "hot money" will have ended up being speculated on the commodity exchanges, but thinking that is the only reason for recent price volatility is probably incorrect.

edinburgher

Personally I'm blaming manbearpig. Oh wait - wrong thread

CLAPTON

In economics, the money supply or money stock, is the total amount of money available in an economy at a particular point in time.[1] There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits (depositors' easily-accessed assets on the books of financial institutions



What Is the Money Supply?

The U.S. money supply comprises currency—dollar bills and coins issued by the Federal Reserve System and the U.S. Treasury—and various kinds of deposits held by the public at commercial banks and other depository institutions such as thrifts and credit unions. On June 30, 2004, the money supply, measured as the sum of currency and checking account deposits, totaled $1,333 billion. Including some types of savings deposits, the money supply totaled $6,275 billion. An even broader measure totaled $9,275 billion.
These measures correspond to three definitions of money that the Federal Reserve uses: M1, a narrow measure of money’s function as a medium of exchange; M2, a broader measure that also reflects money’s function as a store of value; and M3, a still broader measure that covers items that many regard as close substitutes for money.




money supply






Definition

The total supply of money in circulation in a given country's economy at a given time. There are several measures for the money supply, such as M1, M2, and M3. The money supply is considered an important instrument for controlling inflation by those economists who say that growth in money supply will only lead to inflation if money demand is stable. In order to control the money supply, regulators have to decide which particular measure of the money supply to target. The broader the targeted measure, the more difficult it will be to control that particular target. However, targeting an unsuitable narrow money supply measure may lead to a situation where the total money supply in the country is not adequately controlled.


Read more: http://www.investorwords.com/3110/money_supply.html#ixzz1HUcRWMCg

gagahouse

purch wrote: »

Only by the kneejerk brigade.

The prices of those commodity's that are non-exchange traded, and therefore not open to speculation, have risen just as much, and in some cases more than those commodity's which are exchange traded.

Certainly some "hot money" will have ended up being speculated on the commodity exchanges, but thinking that is the only reason for recent price volatility is probably incorrect.

Not strictly true, what about OTC commodity swaps that allow you to swap non-exchange traded commodities for a cash flow like jet fuel? I can be a hedge fund with no physical interest in the underlying and create and sell a commodity swap to a producer or a bank to speculate on the price of jet fuel rising.

If I've done the trade with a bank, the bank is exposed to the price of jet fuel falling or rising and will seek to offset this risk by doing the reverse of the swap with a buyer of the physical. Or it can try to hedge itself with a correlated product like heating oil, the problem is the correlation is never 1:1 so they have to dynamically hedge this by constantly buying or selling heating oil futures.

This then creates arbitrage opportunities and so another hedge fund gets involved and does another commodity swap on jet fuel.

All this affects price - it's hard for people to understand because they have no visibility of what exactly goes on in the OTC markets unless they work in them - these are private, mostly unregulated markets where 2 actors can create whatever contract to speculate on whatever they want, bet most of you never heard of catastrophe derivatives where you can hedge or even speculate on the financial damage of a hurricane or earthquake.

I'm still not convinced!