US economy, commodity prices and the trade cycle

The current economic situation brings to mind 1999 when worries about the state of the US economy were piling up faster than rationalisations about the country's alleged growth rate. There was less talk of a "new era" economy and more about a "correction". What was it that brought about a more subdued assessment in so many quarters? Commodity prices are the answer. The problem with commodity prices is not their price falls but the squeezing of their price margins, the difference between costs and prices. This is an important signal to look for yet, like the Titanic's SOS, no one seemed to have been listening. It's the same old problem of not seeing the trees because of the wood. And in this instance, price margins were the trees. We witnessed mood swings from overvalued stock to falling commodity prices and back again. First, so we were told, the former could burst and send the economy into recession; on the other hand, a continuing fall in commodity prices would tip the world into a global recession. Well, which one was it? Neither, is the answer. Falling commodity prices can no more cause a recession than falling share prices can. And yet the two are closely linked just as some clusters of mergers are. In economics, everything is connected to everything else and prices are the means by which this is accomplished. Distort prices and you discoordinate the whole economic process. This, unfortunately, is precisely what ...

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