The following editorial was published in Price Perceptions issue #1235 on February 8, 2003

Division to Integration!

In recent years it has been difficult to explain many economic and political events. For instance...

  • Why are foreign producers willing to exchange hard earned labor and goods for a simple piece of paper – the US dollar? Their acceptance of dollars in return for “real” goods has crippled the once great US manufacturing machine. Last year, only 11 million US workers were employed in manufacturing versus 21 million working for government.

  • In the Nineties, Central Banks around the world began “cashing in” gold reserves for pieces of paper – the US dollar. The reason given was to earn interest on reserves by investing in US Treasury debt. Nations around the world have traded the security of holding “physical” assets – in return for paper assets controlled by a foreign nation.

  • Japan, the world’s second largest economy, has been in recession/depression since the early Nineties. In a desperate effort to revive the economy, they printed more Yen through issuance of government debt. Japan’s government debt is forecast to reach a staggering 150% of gross domestic product this year. Yet, the Yen is currently trading double its mid-Eighties value.
There are numerous other events in recent years that defy historic precedent and common sense reasoning...
  • While rich countries expand trade in dollars, poor nations have resorted to the stone age medium of – barter. In November, DaimlerChrysler began accepting grain in payment for cars in Argentina. This week, Egypt announced a plan to trade citrus fruit for wheat with Russia.

  • Although US grain prices are cheap by historical standards, eastern poultry and hog producers are importing feed wheat from Europe and soybean meal from South America. This week, rumors circulated that southeastern processors plan to import Brazilian soybeans next summer.
What’s happening? Has the world reached an intellectual plateau that allows us to import our physical needs in return for a paper promise? I recently read a book by Thomas Friedman that helped answer some of the foregoing questions. In Longitudes & Attitudes, he explains that in past history, the world was always a divided, chopped up place. Nations kept their industries, economies, and political systems separate. There was balance and control... US power balanced Soviet power... Nations controlled their economies through taxing and monetary policies.

Through globalization, we have moved from a system built around division... to a system built around integration. We are all connected! Markets are now a function of millions of investors moving money around the world with the click of a mouse. This pool of investors tends to move in tandem, or “herd” like. They can have a tremendous impact on markets as well as governments... Look what happened when the “herd” abandoned the Argentine Peso.

At the present time, the “herd” still favors the dollar. But, they appear to be losing confidence in some dollar assets, such as the US stock market. Will they also lose confidence in US Treasuries? If confidence begins to wane in other dollar assets, how will it change our perceptions of commodity values?

If anything is apparent about the shift from division to integration, it is the deterioration of control by governments over their own economies and values. As commodity traders, we must become more aware of outside influences on the markets we trade.

Bill Gary
CIS, Inc.


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