From Dizzynomics:
Manufacturing Collateral: the consequences
Have decided to repost this manufacturing collateral post from May 2013. Key point is we had a false scarcity amid plenty scenario for since 2008 due to the use of commodities as collateral, which resulted in an artificially inflated price, which sent the wrong message to economy, which led to over-investment in oil infrastructure and which now can’t break even unless someone is prepared to subsidise all those producers for manufacturing something most people don’t need.
(The same story of over-investment due to over-inflated prices on the back of financialised hoarding also applies to Bitcoin.)
That said, I’m not sure any of this a bad thing, when you look at it from the big picture perspective. The self-squeeze exercise did result in us acquiring the knowledge of how to cover supply shortages if and when they occur relatively quickly (shale/tight oil) — something that can’t be taken back, and something which now shifts the power balance from oil producer nations to consumer nations, since the former can no longer terrorise consumer nations with the prospect of supply cuts. That should de-risk western markets substantially.
So I’ve just done two presentations on what I’ve called the “scarcity amid plenty” phenomenon in commodities....MORE
I think on average about 30 per cent of the room gets what I’m talking about. Possibly because I am a nervous presenter?
To sum up:
The argument is that something strange happened to commodities in 2005, which changed their nature.
As well as meeting consumption demand they suddenly started turning into an asset class, and a form of collateral.
Why did this happen?
Well, 2005 — which marked the real start of the bull run — was the year US interest rates started to be increased. US housing prices peaked the same year, and it was also the year that the issuance of securitised mortgage backed securities was at its record highs.
I postulate that even though interest rates were on the rise there was a type of vicious circle in the investment world. A shortage of high-yielding safe assets and the sudden under performance of the housing market created a real incentive for a new asset class to be created....
