Why monetary expansion shoots up commodity prices?

[eugenekop]

Appreciate your answers.

 

[tod evans]

Same amount commodities, more money.

 

[presence]

Catalysed by commodity futures market

http://www.dummies.com/how-to/content/how-money-supply-affects-commodity-tendencies.html

As a general rule, futures prices respond to inflation. Some, such as gold, tend to rise; others, such as the U.S. dollar, tend to fall. Here are the basics of money supply/commodity tendencies:

• Metals, agricultural products, oil, and livestock contracts generally tend to rise along with money supply.
• Generally, bond prices fall, and interest rates or bond yields rise in response to inflation.
• Stock index futures are more variable in their relationship with the money supply, but eventually, they tend to rise when interest rates are falling, and they tend to fall when interest rates reach a high enough level.
• Currencies tend to fall with inflation.

In a global economy, many of these dynamics occur simultaneously or in close proximity to each other, which is why an understanding of the global economy is more important when trading futures than when trading individual stocks.

So even though YOU may not have more money after a QE or other money supply increase: The market realizes that the total economy has more money nearly instantly in the commodity futures markets.

 

[acptulsa]

Monetary expansion shoots up all prices. Monetary expansion shoots up no prices.

Using money is no different from bartering. Once upon a time you could get quite a lot by trading a typewriter for it. Now you can barely trade a typewriter for a cheeseburger. Why? Because the computer made all the typewriters essentially surplus and nearly worthless.

Well, the Fed has made the dollar nearly worthless by vastly increasing the surplus. The commodity is worth what the commodity is worth. Only the dollar has changed.

Do FRNs outnumber tree leaves yet?

 

[Carehn]

Works in many ways.

The best way to understand this is to think of the dollar as a stock in companies. If they split the stock (double the amount of shares) then every share is worth half as much so can only buy half of the commodity it could have before the split. Only when a stock is split every stock owner gets double the shares they had. When they print a dollar it has the same effect only they do not give you any more dollars to replace your loss of value. Only the Bank gets the new dollars.

Now because the bank has yet to spend the new cash prices do not rise right away. The new cash allows the fed to lower interest rates because banks in theory will borrow more money with an interest rate of 1% then they would at 2%. So when they say lower interest rates they mean print more money. It is important to know that in a free market Interest rates would be set by the market and the market or banks would set interest rates based on the money they had on hand to loan. Less money would drive interest rates up wile more would drive them down as banks seek to be competitive. Lower rates = more loans.

So when they set interest rates as a % that is less the the market would it means they must print cash to make up for the demand created artificially because that % indicates to the banks more cash on hand then there actually is. And this my friend spells trouble. All that cash really only represents good and services, or commoditys if you will that don't actually exist. So the market starts building and buildings crap it cant really afford, see the housing bubble for good example.

Now when the banks get this new money they lend it and this is where rising prices become hard to track because they do not all rise equally. Big business and big government get the money (or most of it) first, so what every they are interested in goes up in price the fastest. School, healthcare, housing, and then the commoditys used most in those fields begins to go up faster then others.

It never is the same because the market is always changing but rising prices eventually effect every portion of the market like ripples in a pond. From a freight train of phosphate all the way down to your little brothers dime bag.

And whats worse is the energy, commoditys, and time that the market did really have are spent on crap it really didn't want or need.

Its F7cked up when you really start to think about it.

 

[presence]

Do FRNs outnumber tree leaves yet?

Interesting question.

Total dry weight per acre of average cover... lets say 3 metric tons.
2.3 billion acres in US

6.9 Billion Metric tons of leaf matter


A million bucks weighs a metric ton. http://www.fivecentnickel.com/2006/02/07/how-much-does-a-million-dollars-weigh/
M1 after adjustment is actually 170% higher at $2,918 billion. http://www.fgmr.com/us-dollar-money-supply-is-underreported.html

2,918,000 Million Dollars in supply

2.9 Million Metric Tons of money in supply

2379 times as much leaves as FRN's

so not yet. Maybe next year.

 

[acptulsa]

so not yet. Maybe next year.

Sounds like three months, not a year. I think this winter will make the leaves more dear and rare than FRNs.

 

[MozoVote]

One of the best quotes from the dot-com bubble I'll always remember is: "There is no inflation, because all the inflation is in the stock market". When there is excess money, the greater fool theory is set in motion somewhere. But it's not necessarily going to appear in consumer goods inflation. At least, not right away. But if traders think that gold and silver have become "played out" and move into basic commodities that are needed for everyday things, look out...

 

[eugenekop]

I should have mentioned that I am a versed libertarian and supporter of the Austrian school of economics. Naturally I know that inflation increases all prices. My question was why commodity prices are increased significantly more than others. For example why oil, food and farm prices went ballistic while most other prices have increased only in single digits?

 

[Danan]

I should have mentioned that I am a versed libertarian and supporter of the Austrian school of economics. Naturally I know that inflation increases all prices. My question was why commodity prices are increased significantly more than others. For example why oil, food and farm prices went ballistic while most other prices have increased only in single digits?

Could be that production got more efficient in the consumer goods market than in mining/drilling. There is no way to isolate the effects of monetary policy from other changes in the economy though.

Or there is more increased global demand in commodities than in consumer goods (should be true for China), or plenty of other reasons like the composition of capital, different time horizons in the production process and the importance of the interest rate, etc.

 

[Steven Douglas]

I should have mentioned that I am a versed libertarian and supporter of the Austrian school of economics. Naturally I know that inflation increases all prices. My question was why commodity prices are increased significantly more than others. For example why oil, food and farm prices went ballistic while most other prices have increased only in single digits?

That goes right to the heart of market distortions that occur when the relative scarcity of anything in demand, including but not limited to currency, is centrally controlled and manipulated en masse.

Everything in exchange in the market, including all media of exchange, including fiat currencies, behaves as a commodity. There are no exceptions to that rule. The only thing special about a currency is its one-to-many relationship, making it a ripe target for market manipulation and mass distortion. But it is NOT the only commodity in exchange with a one-to-many dependency relationship with other commodities. Oil is another, with spigots that are in the hands of relatively few, and thus with a scarcity of supply that can be artificially manipulated. That fact alone gives currency manipulators and debauchers like the Fed lots of cover, especially if they can get everyone thinking of currency inflation (actually increasing the supply that enters into circulation, a cause with many effects) strictly in terms of price inflation (one effect with many possible causes). How do you separate the Fed's turd in the punchbowl from the others it was blended in with like so much sewage? You cannot give attribution in terms of effects, because there are other factors. The market price of oil directly affects food and farm prices in many of the same ways that currency manipulations. EFFECTS are the Fed's funhouse mirror.

It is for that reason that you can only address central manipulations as a matter of principle: e.g., is counterfeiting -- a crime when practiced by individuals -- occurring, and can this practice be justified when practiced only by the state, or a private entity with a license issued by a state?

Politicians, with the help of economists, (or vice versa, in the case of people like Keynes) go into a full blown rationale, arguing in strictly macroeconomics terms which ignore all moral, or normative aspects entirely, as they model everything on a strictly cost-benefits basis (always to some nebulous macroeconomic aggregate blob called "the economy"). So it doesn't matter if you are talking about currency debasement or even mass murder -- it can all be modeled by economists, who can make a solid -- albeit strictly economic -- case in favor of a given activity.

The Pontius Pilate economists can wash their hands, because they don't make policy, let alone human value judgments, doncha know. They only model scenarios -- that policy makers "rely on". It is up to the policy makers to decide whether any activity by the state is considered criminal, but the microeconomics effect on individuals isn't even being addressed. That is because people -- real human individuals -- are just so many variables counted as an aggregate number, and treated like any other variable. Thus, what is good for "the economy" is not necessarily 'good' for billions of individuals in a given economy. Thus, policy makers also wash their hands, because economists are akin to scientists, doncha know. They are past making moral decisions as a matter of principle -- "We're just interested in doing what is good for 'the economy'".

Thus, policy makers and economists are engaged in something I think of as "morality laundering", using currency.

 

[Paul Or Nothing II]

I should have mentioned that I am a versed libertarian and supporter of the Austrian school of economics. Naturally I know that inflation increases all prices. My question was why commodity prices are increased significantly more than others. For example why oil, food and farm prices went ballistic while most other prices have increased only in single digits?

Because people have finite amounts of money so initially, as ALL prices start rising, people realize that they can't buy all that they previously could buy or at least not in such quantities & they start prioritizing & that causes demand & prices of some more important products to rise faster than the rest.

For a rather simplified example, let's say you have $100, you are able to buy 10 goods/services worth $10, let's say as prices start rising & reach $20 per product, your income won't have risen yet then at $20 per product, you can only buy 5 products so you will prioritize on the most important 5 products, many others will do the same, some will buy less of each product, which means demand & prices for more important products, which everyone wants will rise at a faster pace while demand & prices of products which aren't the priority for most people will lag.

Obviously, food, oil, farm products & such are likely to be the most prioritized products by most people so they run faster than everything else.

 

[pmbug]

...
Do FRNs outnumber tree leaves yet?

Wrong question. It's not about tree leaves. It's about digital zeros and ones. The problem is that the economy overheated on credit (digital zeros and ones). Digital zeros and ones are far to easy to create (and destroy).