Wednesday, May 22, 2013


It's supposed to be well-established that commodity prices are the inverse of interest rates. Interest rates are as low as they can be and luxury housing prices are high, for example. But the rest of the economy is not wildly inflated. Is liquidity trapped only for the 99%, and not for the luxury economy of the 1%? Anyone know?

Update with my own guess, since nobody ventured: low interest rates in a liquidity trapped recession hike luxury assets like the stock market and luxury housing, but don't stimulate the economy. Quantitative easing adds to the luxury market, since it pumps money directly to the 1% -- the banks. The underlying trouble is the lack of fiscal stimulus coming from Congress made worse by the sequester. In short, the well-established inverse relation between interest rates and commodity prices is just a generalization, not a rule. The economy is like the proverbial horse -- the Fed can flood the land with money, but it can't make that horse drink.


Anonymous said...

It's supposed to be well-established that commodity prices are the inverse of interest rates?

Well established by whom? What are you talking about? That makes no sense at all.

rob said...

Well, it makes plenty of sense (low interest rates=>inflation for example), the question is whether it's true or only partially true. Easy money (low interest rates) flows into commodity inventories (we saw that leading up to the Arab Spring), on the one hand, and on the other, it curbs extraction of new resources and commodities because the low interest rates reduce their monetization. Yves Smith posted on it back in 2008:
Here are the originals:

That easy money/low interest rates leads to inflation has been orthodoxy since Friedman at least. It was Volcker's successful program to curb inflation by increasing interest rates, causing a recession, and Bernanke's opposite strategy to take us out of recession, allowing inflation. But it also has a specific reflex in commodity prices. QE2 caused a global price hike in food prices as investors left the dollar for commodities, that caused the Arab Spring. Not exactly what Bernanke anticipated. His response was washing his hands: other nations have to deal with their own inflation, he quipped, cynically, I thought.