Thursday, May 1, 2008
Krugman on Commodities
"Will limited supplies of natural resources pose an obstacle to future world economic growth? How you answer this question depends largely on what you believe is driving the rise in resource prices. Broadly speaking, there are three competing views. The first is that it's mainly speculation. ... The second view is that soaring resource prices do, in fact, have a basis in fundamentals. ... The third view is that the era of cheap resources is over for for good. There are some very smart people--not least, George Soros--who believe that we're in a commodities bubble. ... My problem with this view, however, is this: Where are the inventories? ... Inventories of food and metals are at or near historic lows, while oil inventories are only normal. ... Meanwhile, resources are getting harder to find. Big oil discoveries, in particular, have become few and far between, and in the last few years oil production from new sources have been barely enough to offset declining production from established sources. ... Suppose that we are really running up against global limits. What does it mean? ... But rich countries will face steady pressure on their economies from rising resource prices, making it harder to raise their standard of living", Paul Krugman (PK) at the Houston Chronicle, 23 April 2008.
I agree with PK, who writes, "I find myself somewhere between the second and third views". I see the first "view" as an empty statement. We always have speculation. So? There are always longs and shorts. Why suddenly did prices rise and are staying high? What changed in the last two years?