The Iranian Bourse, Commodity Prices and Monetary Policy Part II
The Asian economies and world petro dollars (currently holding 4 times the bank of the Asians) have been buying our bonds to keep their own currencies competitive and keep cheap money flowing through the American consumers spigot (housing ATM).
We also know that 60% of the windfall profits are being saved or recycled into the local economies of the oil producing countries, the other 40% is being used for foreign asset acquisition (real estate, resources, business interests and bonds) and speculative hedging.
We know that through paper contract leverage (i.e. options & futures on barrels of oil that don't even exist, nor can ever be physically delivered) the price of any commodity escalates even further.
We think that lax monetary policy and the ensuing artifical suppression of high end interest rates (through monetary sterilization) is at fault for rising asset and commodity prices on three levels:
One being overinvestment in developing economies where labor is at the margin, such as China.
This results in excess domestic commodity consumption through infrastructure and commercial development. Resulting in an overload on current commodity extraction technologies and production capacities.
Two being the propensity for a consumer based economy (read US) to borrow "free money" for speculative and consumption purposes.
The goods being produced by the developing economies are cheap on the labor side, not the commodities input side. The commodities themselves are energy intensive to extract, produce and transport. Rest assured that additional supply and capacity don't magically appear overnight.
Three being the gravitational effect of capital, seeking higher yield at lower risk.
This would cause the cash flush public speculators and producers of the commodities themselves (ie. oil producing entities and countries) to engage in a run up of asset and commodity prices in the form of overspeculation and hedging through leveraged options and futures.
If extraction and production technologies improve; and additional demand based production capacity comes on line; and consumption spending pulls back; we may have a capacity overshoot and resulting pull back in the broader commodities markets.
A very interesting corollary is the fact that energy pass through inflation of material inputs is masked by the cheap labor inputs on some goods. This is an illusury effect which is difficult to quantify with current metrics. Therefore the rate of real or core inflation is far higher than most suspect.
Since our manufacturing and textile jobs have been outsourced and the remaining auto industry jobs are about to disappear, the bulk of the manufacturing isn't being done here anymore.
A pull back in US consumer spending will have more serious consequences to the stability of developing economies and the profits of multinationals who have invested there.
We also know that 60% of the windfall profits are being saved or recycled into the local economies of the oil producing countries, the other 40% is being used for foreign asset acquisition (real estate, resources, business interests and bonds) and speculative hedging.
We know that through paper contract leverage (i.e. options & futures on barrels of oil that don't even exist, nor can ever be physically delivered) the price of any commodity escalates even further.
We think that lax monetary policy and the ensuing artifical suppression of high end interest rates (through monetary sterilization) is at fault for rising asset and commodity prices on three levels:
One being overinvestment in developing economies where labor is at the margin, such as China.
This results in excess domestic commodity consumption through infrastructure and commercial development. Resulting in an overload on current commodity extraction technologies and production capacities.
Two being the propensity for a consumer based economy (read US) to borrow "free money" for speculative and consumption purposes.
The goods being produced by the developing economies are cheap on the labor side, not the commodities input side. The commodities themselves are energy intensive to extract, produce and transport. Rest assured that additional supply and capacity don't magically appear overnight.
Three being the gravitational effect of capital, seeking higher yield at lower risk.
This would cause the cash flush public speculators and producers of the commodities themselves (ie. oil producing entities and countries) to engage in a run up of asset and commodity prices in the form of overspeculation and hedging through leveraged options and futures.
If extraction and production technologies improve; and additional demand based production capacity comes on line; and consumption spending pulls back; we may have a capacity overshoot and resulting pull back in the broader commodities markets.
A very interesting corollary is the fact that energy pass through inflation of material inputs is masked by the cheap labor inputs on some goods. This is an illusury effect which is difficult to quantify with current metrics. Therefore the rate of real or core inflation is far higher than most suspect.
Since our manufacturing and textile jobs have been outsourced and the remaining auto industry jobs are about to disappear, the bulk of the manufacturing isn't being done here anymore.
A pull back in US consumer spending will have more serious consequences to the stability of developing economies and the profits of multinationals who have invested there.
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