Commodities will come back
Commodities prices have been beaten as of late due to the problems with the economy. As the world economy shrinks and minor deflation occurs, commodities prices will drop across the board. This sudden and sharp drop will not last forever largely due to the $700 Billion bailout and how it will affect the money supply going forward.
A slowdown in credit is largely to blame for the economic troubles. With a shrinking credit supply comes lower prices for goods and services. If consumers have less money either in cold hard cash or limited credit accounts they won’t be able to pay top dollar for goods and services. But a rapid change in money supply will occur within the next few years as the bailout money meets fractional reserve banking.
Right now banks are hoarding any amount of money or credit that they currently posses. In this cycle it just doesn’t make sense to make loans, banks can’t make any money and are instead focusing on getting rid of their own debts and assets rather than generating new assets. When the banking industry turns back into profitable territory, lending will begin again and fuel a new bubble.
Prior to the bailout M2 money supply sat at just around $7 Trillion. An infusion of $700 Billion adds an instant 10%, but lets not stop just there. With $700 Billion on hand, banks will be able to reserve $70 Billion of that figure and lend out $630 Billion. Some of this $630 Billion will inevitably make it back into the bank accounts of people, businesses and local treasuries.
Consider this, if the US economy is based 70% on consumption, it is likely that $441 Billion (70% of $630 Billion) will make its way back into bank accounts and corporate accounts. This means that the fractional reserve system can work its magic again, this time to reserve $44.1 Billion and loan out another $396.9 Billion. Its easy to see how the fractional reserve system can multiply money and rapidly expand the total money supply.
In just two levels, money supply has already expanded by $441 Billion added to the original $700 Billion. Thats $1.1 Trillion on a money supply currently at $7 trillion, or a change of 15.7%. This kind of inflation rate will inevitably fuel the next commodities blow up. Whether it will happen this year or late in 2009 its hard to say, but its inevitable.
I think you raise a good point with this article, but don’t forget, just because it’s a recession doesn’t mean that there aren’t ways to make money during it.
It’s a buyers market at the moment and that’s really good for those of us with money. The Elevator had a really good article on the subject actually:
http://www.the-elevator.net/content.asp?read=116062008202751
Just because the media say it’s a bad time doesn’t mean you can’t do well from it.
There are probably more ways to make money in this market just because we’re in recession. All this volatility is the jackpot for short term traders.
This article was to focus more on the money supply and how the price of commodities correlate with it.