CRISISBOOM

Author: David Weinstein

I imagine he has to say it, but Bernanke is wrong when he says US monetary policy has nothing to do with international commodity prices. At the height of the Egyptian crisis, which was partly driven by rising food prices, Bernanke couldn’t say, “Oh yea, US policy economic policy is part of the problem in Egypt.” This attitude, however, is both prevalent and respected, and it’s largely wrong.

First of all, commodities as a group are not commoditized – they are not all the same. For instance, the amount of gold in the world is largely fixed relative to annual gold production. Along with its historical position as a store a value, Gold’s consistent volume about ground is a primary reason for its currency-like quality; i.e. almost entirely driven by overall liquidity. Corn production, on the other hand can vary greatly from year to year given the amount of land devoted to it and the weather. Oil is somewhere in the middle because production can vary, but the worlds known reserves are relatively fixed. The resulting differences in price volatility have been studied ad nauseam and are most simply articulated by the so-called ‘cob-web model’ (see chart below).

Very simply put: Read more…