Wednesday, February 16, 2011

Copper vs. Unemployment

Here's a chart comparing the inflation adjusted price of copper to the unemployment rate from 1948 to 2009.



There's no point even trying to put a trend line on that data. There's no correlation.

Copper trades today at $4.47 per pound. It is well above its long-term inflation adjusted average and is also well off the chart.

What does Bernanke hope to achieve by driving the price of copper into bubble territory? Prosperity?

September 7, 2010
The Failed Keynesian Phillips Curve



Rorschach economics for the win!

October 27, 2010
QE 2 could spawn a commodity boom, hurt recovery

The U.S. Federal Reserve is all set to launch a fresh round of monetary easing at its policy meeting early next month, but a boom in commodity prices triggered by such a move will eventually derail global economic recovery, according to a senior official at the International Energy Agency (IEA).

Source Data:
USGS: Historical Mineral Statistics
BLS: CPI
St. Louis Fed: Unemployment Rate

17 comments:

mab said...

What does Bernanke hope to achieve by driving the price of copper into bubble territory? Prosperity?

Stag,

I'd like to know how much credit has been extended for the purpose of speculating on commodities. I'd also like Bernanke to explain to the public the eCONomic rationale for allowing banks to create credit out of thin air for the purpose of speculation on existing asset prices and commodities.

There's NO F@CKING WAY real capital would ever be "invested" as it is today.

Stagflationary Mark said...

mab,

There's NO F@CKING WAY real capital would ever be "invested" as it is today.

It will end as it always does, in tears.

One cannot prop up fake prosperity with fake prosperity forever. Sigh.

getyourselfconnected said...

I think the FED minutes are clear, higher commodity prices are not a problem, as they see it.

Stagflationary Mark said...

GYSC,

I think this sums up the situation rather nicely.

Low commodity prices were apparently a problem. High commodity prices are apparently not a problem.

All we seem to get are problems!

Where are the solutions to the problems?

mab said...

I think the FED minutes are clear, higher commodity prices are not a problem, as they see it.

GYSC,

I hear you. But I don't buy into the un-proven theory that inflation is "necessary". It's only necessary for rentiers, speculators and asset strippers.

Also, I think the FED minutes are clear, financial fraud is not a problem - it's a feature!

Greensham and Bernanke ignored the housing bubble because their handlers an Wall St. wanted them to ignore it. It's just like WMDs in Iraq. The Bush administration twisted reality to suit their desires.

Stagflationary Mark said...

mab,

"Also, I think the FED minutes are clear, financial fraud is not a problem - it's a feature!"

Excellent timing on my "problem" vs. "solution" theory.

Consumer: I need a solution!
Fed: What's the problem?
Consumer: Fraud!
Fed: That's the problem?
Consumer: Well, it's not a solution!
Fed: Not a problem!

It's like an Abbott and Costello routine.

getyourselfconnected said...

Love it!

Mark, I know we had a difference of opinion on China lowering food in their CPI, but what about scrapping the home price index (its running too hot)? Do the Chinese now use less housing than the past few years as the mature?

Jazzbumpa said...

The top chart is Nude Descending a Staircase #3.

Monetary policy is aiding and abetting the misallocation of resources. This is one of the reasons we need targeted fiscal policy.

But the price of copper is nowhere near as outrageous as you suggest. It's only about 10% above where it was through the first half of '08, before it fell to a multi-year low though Q1 '09. It hit close to $4.00 as long ago as Q1 '06.

Rising, say, 15% in 5 years doth not a bubble make.

China's Yr over Yr consumption grows that much.

Note warehouse stocks are pretty high as well.

Cheers!
JzB

Stagflationary Mark said...

GYSC,

"Mark, I know we had a difference of opinion on China lowering food in their CPI, but what about scrapping the home price index (its running too hot)?"

They've scrapped the home price index? Got a link? I can only find this.

China to Release New Home Price Index Amid Property Boom

"The government will release two indexes of new and second- hand home sales from January, the agency said in a statement posted on its website today. It will stop releasing national average property prices, according to the statement."

Stagflationary Mark said...

Jazzbumpa,

"It's only about 10% above where it was through the first half of '08, before it fell to a multi-year low though Q1 '09."

1. Copper's price is 10% above the price it was during the 2008 commodities bubble.

2. Copper's price is twice its long-term inflation adjusted median price (1948 to 2009, data pulled from the chart in this post). Again.

3. Housing prices reached twice their long-term inflation adjusted prices too. In hindsight, that was a bubble.

I'm not saying it is guaranteed, but that is the risk.

"China's Yr over Yr consumption grows that much."

Has grown that much. Past tense. I posted this earlier today to show why looking at the rear view mirror can be dangerous.

They say the best cure for high commodity prices is high commodity prices. We already saw this once with copper in 2008. Copper prices fell to roughly $1.25 per pound. Copper prices fell to half their long-term inflation adjusted average. Now they are back up to double again.

I expect Jim Chanos to ultimately be proven right about his "treadmill to hell" take on China. If I am wrong to think copper is in a bubble, then that's how I will be wrong.

It is what I believe though. I've been bearish on China since starting this blog and I still am.

As a side note, the inflation adjusted price of copper heading into our Great Depression was also way off this chart. In 1929, copper averaged $1.75 per pound in nominal terms. Investors were convinced that the boom would last forever. Oops.

getyourselfconnected said...

http://tinyurl.com/6bjpw4n

Stagflationary Mark said...

GYSC,

From your link:

"When these changes come out, there's always this question of whether you feel happy that they are trying to address the problems or whether you feel vexed that they are still leaving so much in chaos."

No joke there!

Although I did defend the concept that food becomes a smaller part of a typical citizen's budget as a country becomes more prosperous, it was not meant to imply that I trust Chinese statistical data.

I don't!

nanute said...

Mab, You may not think inflation is
"necessary". Without inflation you won't get any job growth, and unemployment will remain at unacceptably high levels. Here's a part of Bill Vickrey's Fallacy #4 of the 15 Fatal Fallacies of Financial Fundamentalism: .....The main difficulty with inflation, indeed, is not with the effects of inflation itself, but the unemployment produced by inappropriate attempts to control the inflation. Actually, unanticipated acceleration of inflation can reduce the real deficit relative to the nominal deficit by reducing the real value of the outstanding long-term debt. If a policy of limiting the nominal budget deficit is persisted in, this is likely to result in continued excessive unemployment due to reduction in effective demand. The answer is not to decrease the nominal deficit to check inflation by increased unemployment, but rather to increase the nominal deficit to maintain the real deficit, controlling inflation, if necessary, by direct means that do not involve increased unemployment. Here's a link to the 15. Very interesting thoughts here.http://www.columbia.edu/dlc/wp/econ/vickrey.html

Stagflationary Mark said...

nanute,

I found your link interesting.

I would point out that it was written in 1996 though. Here are therefore some important terms missing from the article.

1. China
2. India
3. Outsourcing
4. Oil
5. Automation

He starts off talking about inequality and poverty though.

What I can't get a sense of from the article is how he'd use debt if our problems were structural, and not just cyclical.

I have no problem with cyclical solutions to cyclical problems. My concern is in using cyclical solutions for structural problems. I'm of the belief that we're doing that now and it isn't going to work.

nanute said...

Mark,
I know you are of the opinion that what we're experiencing now is structural v. cyclical. I'm not so sure. Granted, Vickrey's writing was in 96', and he has since passed on, so how he'd approach the current problem is open to conjecture. Interestingly, a lot of what he talks about still seems to hold in current conditions. I'd imagine that if he did see the issue as structural, he'd be thinking along the lines of less hours per employee, (more leisure)which would allow for more unemployed to share in the jobs available. The trick would be in making sure that wages held steady v. less hours worked. It would also be a good idea to consider that since technology seems to be moving us "faster in time" a shorter time until retirement would be beneficial.(The current crop of elected idiots are arguing the opposite.) I don't hold to the notion that there is only a fixed number of jobs, just that acceleration of time and technology seems to be compressing demands for labor. Does this make any sense? If you'd like to converse further, tony.daniel@hotmail.com

Stagflationary Mark said...

nanute,

"I'd imagine that if he did see the issue as structural, he'd be thinking along the lines of less hours per employee, (more leisure)which would allow for more unemployed to share in the jobs available. The trick would be in making sure that wages held steady v. less hours worked."

Indeed!

It's funny. I watched the movie "John Q" last night. His hours had been cut to 20 but they continued to pay him the same hourly pay. It's just a movie of course, but it does indeed point out the "trick" you bring up. Sigh.

Stagflationary Mark said...

nanute,

I should add that you can contact me any time through the email within my profile. :)