What’s Real Behind Commodities

Inflation is sustained monetary debasement – money printing, if you prefer – that wrecks consumer prices. It is the other of the evil monetary diseases, the one which is far more visible therefore visceral to the consumers pounded by spiraling costs of bare living. Yet, it is the lesser evil by comparison to deflation which insidiously destroys the labor market from the inside out.

You see inflation around you; anyone can only tell deflation by hopefully noticing and appreciating what must instead be absent (a poignant reminder for US Labor Day).

People with the means don’t sit idly by for either affliction. As to the former, inflation, as noted here investments and activity will flow from the financial to the real. Commodities do particularly well and in that sense they can tell us something about the underlying aggregate opinion of those doing the investing.

Inflation, or something else?

There are, however, real components mixed up in commodity prices. Yes, supply factors balanced against real economy demand before then being spliced into any perceptions money-wise.

Given the real-ness of these prices, would it really surprise anyone that commodity costs seem to correlate very highly with the marginal pass-through economy in China? The Chinese system has for decades acted as the central nexus between the developed world buying manufactured goods made there and the developing, more-resource oriented systems sending raw material to China in order to do the manufacturing.

The latter is and was augmented by how much building inside China the Chinese needed or might still need in order to remain stable in this middle real economic ground.

Build China so China could build all the things. This had meant a huge, sustained influx of those raw materials. The more and faster the Chinese built, the more likely commodity prices in their real sense would be bid upward, too. US QE not much difference (because, in the end, it is not money printing).

Therefore, a relatively stable – even visible – correlation between global commodity prices (in US$’s, of course) and the rate of additional Chinese imports. The more that China demanded from the rest of the world, the more demand for commodities against relatively less elastic supply.

See for yourself:
 

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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