The following editorial was published in Price Perceptions issue #1230 on November 23, 2002
Commodity Inflation? - Part I
Commodity markets have been in a deflationary price trend since the early Eighties. When Alan Greenspan took over the Federal Reserve in the mid-Eighties, his stated goal was to bring inflation down to zero. However, his tight money policies led to a mini stock market crash in 1987. He then shifted objectives to accommodating economic growth.
The Federal Reserve began pumping money into the economy by leaps and bounds during the early Nineties to facilitate growth. Rapid expansion of the money supply led to inflation of paper assets rather than physical assets and the stock market advanced to historic heights.
Following the millennium, the Fed began tightening once again as they became fearful of a bubble in the stock market. However, following a minor period of tightening, the stock market began to unravel and the Fed once again resorted to money pumping. Interest rates were brought down to 40 years lows over a period of 24 months in an effort to halt the stock market slide.
Although money pumping has always worked to resurrect the stock market, it failed in the early stages of the current re-liquification. Economists are comparing the US economy with Japan. Forecasts of recession accompanied by deflation have become a popular theme. Even Fed Governors are talking of fighting deflation.
Results of the Feds recent money pumping binge are still to be determined. However, commodity markets are beginning to show early signs of inflationary trends. The Producer Price Index for October showed the largest gain in 22 months. In addition to the bulge in producer prices, the Commodity Research Bureau Index (CRB) has surged 11% since July.
The Wall Street Journal reported this week that Daimler Chrysler was accepting grain in payment for new cars in Argentina. In other words, grain is becoming the currency of choice in South America. Is it possible that commodities are regaining their stature as a storehouse of wealth after 20 years?
TRADING IN COMMODITY FUTURES OR OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
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