Friday, October 24, 2008

A Commodity bubble is waiting to burst

The WSJ reviews another bubble bursting, just after the subprime one last year :

Credit markets have started to thaw, yet stocks and the larger economy keep sliding. What's going on? Among the problems are the reality of recession and the uncertainty over Barack Obama's policies. But the larger story is that the global economy is fast popping its latest monetary bubble, the one over the last 14 months in commodity prices and non-dollar currencies.


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Its origin. Not decades ago, but this started in 2007, with Ben Bernanke in the top job as Chairman of Federal Reserve :

This is Ben Bernanke's creation. The Fed chose to confront the credit crunch as if it were mainly a problem of too little liquidity, not fear of insolvency. To that end it flooded the economy with money, while taking short-term interest rates down to 2% from 5.25% in seven months. The panic only got worse, and this September's stampede finally led the Treasury and Fed to address the solvency problem by supplying public capital and numerous guarantees to the financial system.



Understanding the chart on the right :

The Fed created a commodity bubble of record proportions, with oil doing a round trip in a single year from $70 up to $147 and back down to $69 yesterday. The dollar also plunged along the way against most global currencies, notably the euro, as the bottom chart illustrates.

The worst part definitely is that oil remained high throughout the year, compelling auto-makers to make huge investments in clean/alternative technology, only to realize oil slump back to $69, and SUVs again in demand.

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2 comments:

  1. [...] Read the original here: A Commodity bubble is waiting to burst [...]

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  2. Definitely will effect us, Hope we learn our lessons now, at least.

    ReplyDelete