The Finite World 

By PAUL KRUGMAN

Op-Ed Columnist The New York Times

December 26, 2010

http://www.nytimes.com/2010/12/27/opinion/27krugman.html?src=me&ref=general

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. 
[photo] Fred R. Conrad/The New York Times

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. 

___________________________________________

Portside aims to provide material of interest to people
on the left that will help them to interpret the world
and to change it.

Submit via email: [log in to unmask]

Submit via the Web: http://portside.org/submittous3

Frequently asked questions: http://portside.org/faq

Sub/Unsub: http://portside.org/subscribe-and-unsubscribe

Search Portside archives: http://portside.org/archive

Contribute to Portside: https://portside.org/donate