John Rapley/Columnist
A couple of weeks ago a little-noticed but significant milestone was crossed in the world economy.
For the first time in a generation, the CRB Index of world commodity prices crossed the 300-mark. It is now headed for record highs.
The CRB Index may be an arcane topic, but it matters to all of us. Because it measures the
average prices paid on world
markets for primary commodities, it provides a rough indication of the earning power of primary-exporters.
In short, it helps us to assess the economic prospects of most developing countries.
The oil story
Right now, these are looking
better than they have in years.
The big story, of course, is oil, whose surge is a cause for concern here in Jamaica. This week, OPEC producers agreed to increase oil output in the hopes of cooling the red-hot oil market.
Yet, whatever fallback in
prices results is likely to prove temporary. All indicators are that the planet has little spare capacity in oil production and refinement just now; yet, its appetite for the black gold roars ahead. Quite
simply, demand continues to outstrip supply.
But there is much more going on here than a rising oil price. If anything, oil has not been a star performer. Across the board, prices on primary exports have recorded double-digit gains over the last three years. So far this year, the rate of increase appears, if anything, to be accelerating.
A couple of forces appear to be at work. One is the astonishing growth of the Chinese economy. As it
rushes to resume its historic place as the world's largest economy, China is sucking up the planet's supply of primary resources for its industries.
Indeed, an army of Chinese prospectors is traversing the globe, trying to locate and secure new sources of minerals. With the Americans preoccupied by their war on terror, the Chinese are even showing up in the United States'
backyard, tying up supplies in places like Latin America, the Caribbean and Canada.
The other force driving the rise of commodity prices has been the declining value of the U.S. dollar.
Over the last couple of generations, the U.S. economy has lived well beyond its means, subsidising a current account deficit by, in effect, printing money. Most of the rest of the world has been happy to play along, since U.S. demand has played such a critical role in the world economy.
Excess of U.S. Dollars
Still, the excess supply of U.S. dollars in the world has inevitably produced speculative bubbles as money chases a limited supply of assets.
First, there was the stock-market bubble of the 90s, which of course ended in tears. More recently, there has been the surging housing market, which more and more economists are arguing is yet another bubble about to burst.
Throughout, China is playing the role of chief cheerleader, exporting billions of dollars of goods to the U.S. and using the money it is owed for them to snap up American assets. This has kept the dollar from going into freefall.
But it also appears to be keeping the bubble from deflating gently in the way the U.S. Federal Reserve Board, for one, would like to see.
However, as they grow ever more wary of the possibility of a full-fledged dollar collapse, many investors are rushing to the security of 'hard assets'.
One can always print paper assets like stocks and bonds to soak up an excess supply of money.
That is precisely what happened in the U.S. in the 1990s. Sooner or later, though, investors demand to see the "beef," and if it does not materialise, they sell their
holdings.
Happy days ahead
With primary commodities, it is different. They are tangible. Moreover, because they cannot be conjured out of thin air, they are seen as good stores of value.
The underlying indicators are that world commodity prices are going to continue rising. This could feed inflation into the world economy, provoking a global slowdown. It could even cause problems in the U.S. economy.
And while some speculators may pull back out of primary commodities if future demand slows down, barring a collapse in the Chinese economy, a sharp fall in commodity prices seems unlikely.
In short, for exporters of
primary goods like ourselves, happy days should be here for a while.
John Rapley is a senior lecturer in the department of government at the University of the West Indies, Mona.
