By PAUL KRUGMAN
Published: December 26, 2010
Oil is back above $90 a barrel. Copper and cotton have hit record highs.
Wheat and corn prices are way up. Over all, world commodity prices have
risen by a quarter in the past six months.
So what's the meaning of this surge?
Is it speculation run amok? Is it the result of excessive money creation, a
harbinger of runaway inflation just around the corner? No and no.
What the commodity markets are telling us is that we're living in a finite
world, in which the rapid growth of emerging economies is placing pressure
on limited supplies of raw materials, pushing up their prices. And America
is, for the most part, just a bystander in this story.
Some background: The last time the prices of oil and other commodities were
this high, two and a half years ago, many commentators dismissed the price
spike as an aberration driven by speculators. And they claimed vindication
when commodity prices plunged in the second half of 2008.
But that price collapse coincided with a severe global recession, which led
to a sharp fall in demand for raw materials. The big test would come when
the world economy recovered. Would raw materials once again become
expensive?
Well, it still feels like a recession in America. But thanks to growth in
developing nations, world industrial production recently passed its previous
peak - and, sure enough, commodity prices are surging again.
This doesn't necessarily mean that speculation played no role in 2007-2008.
Nor should we reject the notion that speculation is playing some role in
current prices; for example, who is that mystery investor who has bought up
much of the world's copper supply? But the fact that world economic recovery
has also brought a recovery in commodity prices strongly suggests that
recent price fluctuations mainly reflect fundamental factors.
What about commodity prices as a harbinger of inflation? Many commentators
on the right have been predicting for years that the Federal Reserve, by
printing lots of money - it's not actually doing that, but that's the
accusation - is setting us up for severe inflation. Stagflation is coming,
declared Representative Paul Ryan in February 2009; Glenn Beck has been
warning about imminent hyperinflation since 2008.
Yet inflation has remained low. What's an inflation worrier to do?
One response has been a proliferation of conspiracy theories, of claims that
the government is suppressing the truth about rising prices. But lately many
on the right have seized on rising commodity prices as proof that they were
right all along, as a sign of high overall inflation just around the corner.
You do have to wonder what these people were thinking two years ago, when
raw material prices were plunging. If the commodity-price rise of the past
six months heralds runaway inflation, why didn't the 50 percent decline in
the second half of 2008 herald runaway deflation?
Inconsistency aside, however, the big problem with those blaming the Fed for
rising commodity prices is that they're suffering from delusions of U.S.
economic grandeur. For commodity prices are set globally, and what America
does just isn't that important a factor.
In particular, today, as in 2007-2008, the primary driving force behind
rising commodity prices isn't demand from the United States. It's demand
from China and other emerging economies. As more and more people in formerly
poor nations are entering the global middle class, they're beginning to
drive cars and eat meat, placing growing pressure on world oil and food
supplies.
And those supplies aren't keeping pace. Conventional oil production has been
flat for four years; in that sense, at least, peak oil has arrived. True,
alternative sources, like oil from Canada's tar sands, have continued to
grow. But these alternative sources come at relatively high cost, both
monetary and environmental.
Also, over the past year, extreme weather - especially severe heat and
drought in some important agricultural regions - played an important role in
driving up food prices. And, yes, there's every reason to believe that
climate change is making such weather episodes more common.
So what are the implications of the recent rise in commodity prices? It is,
as I said, a sign that we're living in a finite world, one in which resource
constraints are becoming increasingly binding. This won't bring an end to
economic growth, let alone a descent into Mad Max-style collapse. It will
require that we gradually change the way we live, adapting our economy and
our lifestyles to the reality of more expensive resources.
But that's for the future. Right now, rising commodity prices are basically
the result of global recovery. They have no bearing, one way or another, on
U.S. monetary policy. For this is a global story; at a fundamental level, it's
not about us.
http://www.nytimes.com/2010/12/27/opinion/27krugman.html?_r=1&partner=rssnyt&emc=rss
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