Sunday, December 9, 2012

Back When I Could Write: "Commodities, QE2, Negative Real Interest Rates and Gold"

Originally posted April 7, 2011.

I've chided Professor Krugman for his insistence that QE2 has nothing, absolutely nothing, to do with commodity inflation to the point that when he insisted global warming damaging the Russian wheat crop was the cause of food price increases, I degenerated to playground taunts: "Hey Paul, must've been a horrible silver harvest" etc.

I am not proud of that economic argumentum.

It's just that I get confused by academics who will brook no dissension from their modeled views, even when, as in the case of the oil spike of June 2008, it is market participants making the case that it was price speculation feeding price speculation.

Professor K. told us no, the cause of the run-up was a permanently high plateau in consumption.
Wait, sorry, it was Professor Fisher* who used that unfortunate geologic metaphor. Krugman said oil was up because people were using more.

After oil dropped from $147 to it's December 2008 low of $32.40 for the front month contract and $30.28 spot we didn't hear as much argument against the speculation hypothesis**

That rambling preamble leads to a few FT Alphaville posts, a Fed Governor's confession and a Bank of Japan paper.

First FTA, reading these three posts is pretty much a masters class in real world econ:

Two views on QEased commodities prices…
which links to the San Francisco Fed saying don't blame the Fed (the FRBSF paper is flawed in at lest two ways, I'll get around to it, I promise) and Pragmatic Capitalism's comments on the Bank of Japan paper which begins:
Global commodity prices have been rising again since 2009, and particularly rapidly since the fall of 2010. While the strong increase in commodity prices has been driven by global economic growth propelled by emerging economies, speculative investment flows into commodity markets have amplified the intensity of the price surge. The dynamics of global commodity prices has been changing as well, in accordance with the growing presence of financial investors in commodity markets. The entry of new financial investors has paved the way for the “financialization of commodities”....
He's got it Scribd or here's the BoJ PDF.
Next FTA serves up:

QEased commodities, chart du jour
The QEased commodity debate is on fire.
And to keep it sizzling on Wednesday, we throw this chart of the Continuous Commodity Futures Price Index from Sean Corrigan at Diapason Commodities into the mix...
Finally the biggie and the inspiration for this ramble:
Carry trade = quantitative easing
Can prolonged periods of negative real interest rates ever be good for economies in a globalised world?
Anders Aslund, senior fellow of the Peterson Institute for International Economics, argues no.
In an article published on Wednesday he presents some interesting stats to support the idea that any prolonged period of negative real interest rates will almost always result in unwanted and dangerous side-effects....MUCH MORE
As for gold, this chart is a bit dated and I'm too lazy to make one but you get the point:

Finally a less juvenile call out to the good Professor:
Dear Paul Krugman: "Fed’s Hoenig: Policy Plays Role in Commodity Price Surge" Plus: The Octomom on birth control
*Prof Irving Fisher's timing of his Sept. 4, 1929 statement "There may be a recession in stock prices, but not anything in the nature of a crash."
(the DJIA had peaked the day before at 381, it would bottom at 41 in 1932), or his more famous locution ""Stock prices have reached what looks like a permanently high plateau." on Oct. 21.
Black Thursday came three days later.

**Actually institutional long only investors such as CalPERS entering into swaps positions with the likes of Goldman Sachs who were using their 'Commercial' designation as cover for their clients to evade 'speculative' position limits in a couple different ways. They were also making money off the eponymous Goldman Sachs Commodity Index, heavily weighted toward energy. GS would pocket a commission and more pecuniously the 'roll' when futures expired.

If you wish, use the search blog box, keywords Goldman, oil, Calpers, swaps, masters or some combination of same.
See also:

Dear Paul Krugman: "Wheat Collapsing as Protests Prompt Speculators to Desert Food"
I'll put one Bloomberg journalist up against as many Nobel Econ award winners as you want.
Especially if the Nobelists include the LTCM boys, Merton and Scholes, and Krugman....