Commodity Prices: The Good, The Bad, The Ugly, and The Irrelevant

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"Commodity Prices: The Good, The Bad, The Ugly, and The Irrelevant"

People continue to struggle in vain to produce some kind of possible bad consequences of “currency wars.” The latest, the WSJ says that if everyone tries to devalue simultaneously the price of oil will go up:

When one country devalues its currency, others tend to follow suit. As a result, nobody achieves trade gains. Instead, the devaluations put upward pressure on the prices of commodities such as oil. Higher commodity prices, in turn, can cut into global economic output. In one ominous sign, the price of oil is up 8.7% since August 27.

If you try to reason in this direction, you end up tying yourself into knots. Is a higher price of oil “ominous.” Well it depends why it’s going up. If a bunch of equipment in the North Sea breaks, then the price of oil is increasing because the quantity of oil available to the world economy has declined. That’s bad because oil is useful. But conversely, if the US economy were to start growing rapidly that would increase the demand for oil and lead to a price increase. That, however, would be a good thing. If the world’s central banks engage in coordinated monetary stimulus, that will result in some inflation (and hence higher nominal oil prices) but some inflation would be helpful at the moment. But if Israel and Iran go to war, that will also increase the price of oil and it’ll be terrible.

In general, higher supply of useful commodities is good (and leads to lower prices) and higher demand for useful commodities is a side-effect of good things (and leads to higher prices) so you can’t just look at commodity prices and draw any conclusions about what’s happening.

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