This week's IMF Global Outlook Report leaves little doubt that economists have absolutely no operative understanding of what is going on around them. Forecasts have been massively revised downwards. Still, it is difficult for anyone to ignore the rising bubble in commodity prices. This bubble, economists speculate, must either be speculative or demand driven. Either it must be "artificial" in the sense of being created by bastards with money buying up commodity futures, or it must be "natural" in the sense that it is driven by consumer demand, i. e. we are using so many commodities that a supply-side shortage causes prices to rise. The fallacy of this dichotomy can be seen by looking at the housing collapse: In this situation, demand was speculation, and speculation was demand. People demanded "ownership" of more and more homes; the Fed printed money to give to banks to lend out for this purpose. This demand was shifted onward to global investment vehicles. At no point was there any firewall between demand and speculation.
Now take commodities.
If Chinese production massively outstrips American demand, it might make very little difference what is driving commodity prices right now: the speculation bubble will burst as a result of lowering demand. So far in '08, the reverse has predominated in housing: lowering demand (speculation) (and deterioration of consumer sentiment) as the result of an apparent burst of a speculative bubble (housing). Seems more and more likely that commodities will deflate now in the other direction. Its going to keep falling like a feather rather than a rock. The emergent commodity bubble is just more Fed printing money with an eye to growth. And indeed, Americans now store more commodities in their driveways, gas tanks, and bodies than at any other time in history. Remember, the commodity bubble is literally a bubble: round american tummies need a correction more than housing ever did!
If American demand for commodities drops off, and God-help-our-ailing-arteries it should, the next bubble will be in services, and only the non-manufacturing indexes will begin disclose what the new economy will look like.
