Jump to content
House Price Crash Forum
Sign in to follow this  
ParticleMan

How A Weak Dollar Regime Will Puncture The Commodities Boom

Recommended Posts

If, as recent wisdom suggests, the US is now likely hell-bent on sacrificing its reserve currency status, reputation, and dollar - all in order to prevent triggering the most deflationary event seen this side of the Great Depression - the rational question becomes, who will feel the pain, and when?

As to who - one need look no further than current supply contracts drawn in USD.

If unhedged, the party who has agreed to supply some good, and incurred the costs to do so - and who is then paid in tomorrow's diluted dollars - will suffer severe margin compression. A supplier cannot unconsume the capital required to manufacture their good. Nor can they reprice its inputs, once transformed. But they must still repay any costs incurred to do so. And the excess or shortfall betwixt these - their cost of capital, input costs, and selling price - is their shareholder's margin.

Regardless of pricing power - the producer's ability to match the dilution of USD as and when it occurs by raising prices - some component of their cost basis will rise. No producer is an island - either labour, or raw (or manufactured) materials will be imported, or purchased from a value-adding importer. All producers - with contracts to supply written in USD - will to a greater or lesser extent suffer this margin compression, because they each will to some greater or lesser extent have direct or indirect costs written in other currencies. And producers of the most price sensitive goods (where demand contracts most rapidly in response to price increases) will be at the sharp end of this.

So dilution of the greenback - to the degree required to avert a AAA-rated-bond led Treasuries implosion - will rock the very basis of manufacture (whether of finished goods, or low order produce such as the commodities trade) - off-, and onshore alike.

This is all well and good. It occurs naturally as a function of the business cycle, with the growth and decline of economies, and appetite for their debt issues. Typically, producers will part- or fully-hedge their output, to smooth volatility, and allow forward production levels (and the corresponding capital and labour consumption) to match measured demand growth (or decline).

But so determined is the land of the free to dump the dollar, so great is the volatility that has been unleashed (the goal is to swallow an eye-wateringly large deficit), that soon, these hedges will unwind. Either becoming too costly to maintain (with the outlook too uncertain to price), or, more simply, through renegation and default as the hedging counterparties generate unrealisable losses. The worst capitalised in this industry - of underwriting USD hedges - will surely be the earliest casualties of this new, determinedly-weak dollar regime.

And in so unwinding, these ailing hedges will expose the very industries they're drawn to protect. Those most sensitive to exchange rate volatility. Those with the deepest capital demands, the longest forward commitments. The most inflexible contracts (in pricing terms). And champion amongst these is the commodities sector.

Either way, hedged, partly, fully, or no - whilst the very economy booms around them, with stratospheric demands on labour - ironically - the very enterprises providing greatest employment will fail, caught between roaring rises in cost basis, and an inability to either reprice, or downscale production at a rate fast enough to satisfy the Federal Reserve's newfound lunacy. One by one, leading with the most price sensitive - typically, those recognising high USD prices on their balance sheets earliest in this super-cycle (the hedging providers themselves, unhedged suppliers, and the heavily geared speculators chasing too-close behind) - will watch their cost basis rise beyond their revenue.

One by one, sector by sector - they will fail. It will simply no longer be viable to produce, incurring rising domestic costs, being repaid in ever more worthless dollars. Attempts will be made to create new contracts, new markets. To sell to the US, to sell elsewhere. But the very rationale and model for production is gone, along with yesterday's strong greenback. Today's prices and today's volumes must reflect today's realities - and nowhere else is able to run the deficit that America once ran, and nowhere else is able to bid with the strength she once did.

And so we move from peak demand to peak supply, and beyond - to glutting, and ulimately, outright (price) capitulation. In an environment mere moments previous signalling spiralling wage-claims, rents, and full labour participation. Much like the housing market, in commodities Wil-E-Coyote is already over the cliff, legs a-whirling, but uncomprehending his fate as yet.

There will be little recognition of this before the fact. There will be hints, warnings - wails from employers faced with rising wage claims, falling overseas sales. But the drunken binge of electorates high on the after-effects of a decade's now-toxic greenbacks will be quite unable to see that more dollars means inevitable failure, a domestic, systemic inflationary collapse. That the very volume of their output is what will cheapen it in the end. That the only market for their produce was a market powered by a ballooning USD-priced deficit, and that this market is already extinct - and the next-best-thing is a mere wading pool in comparison to the once-bottomless mid-Atlantic trench.

In fact, the likely local consensus view will be to misforecast, to overgear - to assume that more 'merkin dollars means more demand, and to reinvest and scale up production accordingly. Much like "executive apartments" at the height of the housing boom, recycled greenbacks will be force-fed to the boilers of whatever engines seem to create more of them more quickly by clever but greedy people acting stupidly and in concert.

Until one by one the producers starve on a diet high in bulk and low on calories. Goods exchanged for a promissary note that's hit parity with the '82 Mexican peso in purchasing power terms. Or goods exchanged for rising volumes of pesos, but in falling volumes. Either way, extinct.

When? If I could answer that, I wouldn't be posting here.

Share this post


Link to post
Share on other sites
If, as recent wisdom suggests, the US is now likely hell-bent on sacrificing its reserve currency status, reputation, and dollar - all in order to prevent triggering the most deflationary event seen this side of the Great Depression - the rational question becomes, who will feel the pain, and when?

As to who - one need look no further than current supply contracts drawn in USD.

If unhedged, the party who has agreed to supply some good, and incurred the costs to do so - and who is then paid in tomorrow's diluted dollars - will suffer severe margin compression. A supplier cannot unconsume the capital required to manufacture their good. Nor can they reprice its inputs, once transformed. But they must still repay any costs incurred to do so. And the excess or shortfall betwixt these - their cost of capital, input costs, and selling price - is their shareholder's margin.

Regardless of pricing power - the producer's ability to match the dilution of USD as and when it occurs by raising prices - some component of their cost basis will rise. No producer is an island - either labour, or raw (or manufactured) materials will be imported, or purchased from a value-adding importer. All producers - with contracts to supply written in USD - will to a greater or lesser extent suffer this margin compression, because they each will to some greater or lesser extent have direct or indirect costs written in other currencies. And producers of the most price sensitive goods (where demand contracts most rapidly in response to price increases) will be at the sharp end of this.

So dilution of the greenback - to the degree required to avert a AAA-rated-bond led Treasuries implosion - will rock the very basis of manufacture (whether of finished goods, or low order produce such as the commodities trade) - off-, and onshore alike.

This is all well and good. It occurs naturally as a function of the business cycle, with the growth and decline of economies, and appetite for their debt issues. Typically, producers will part- or fully-hedge their output, to smooth volatility, and allow forward production levels (and the corresponding capital and labour consumption) to match measured demand growth (or decline).

But so determined is the land of the free to dump the dollar, so great is the volatility that has been unleashed (the goal is to swallow an eye-wateringly large deficit), that soon, these hedges will unwind. Either becoming too costly to maintain (with the outlook too uncertain to price), or, more simply, through renegation and default as the hedging counterparties generate unrealisable losses. The worst capitalised in this industry - of underwriting USD hedges - will surely be the earliest casualties of this new, determinedly-weak dollar regime.

And in so unwinding, these ailing hedges will expose the very industries they're drawn to protect. Those most sensitive to exchange rate volatility. Those with the deepest capital demands, the longest forward commitments. The most inflexible contracts (in pricing terms). And champion amongst these is the commodities sector.

Either way, hedged, partly, fully, or no - whilst the very economy booms around them, with stratospheric demands on labour - ironically - the very enterprises providing greatest employment will fail, caught between roaring rises in cost basis, and an inability to either reprice, or downscale production at a rate fast enough to satisfy the Federal Reserve's newfound lunacy. One by one, leading with the most price sensitive - typically, those recognising high USD prices on their balance sheets earliest in this super-cycle (the hedging providers themselves, unhedged suppliers, and the heavily geared speculators chasing too-close behind) - will watch their cost basis rise beyond their revenue.

One by one, sector by sector - they will fail. It will simply no longer be viable to produce, incurring rising domestic costs, being repaid in ever more worthless dollars. Attempts will be made to create new contracts, new markets. To sell to the US, to sell elsewhere. But the very rationale and model for production is gone, along with yesterday's strong greenback. Today's prices and today's volumes must reflect today's realities - and nowhere else is able to run the deficit that America once ran, and nowhere else is able to bid with the strength she once did.

And so we move from peak demand to peak supply, and beyond - to glutting, and ulimately, outright (price) capitulation. In an environment mere moments previous signalling spiralling wage-claims, rents, and full labour participation. Much like the housing market, in commodities Wil-E-Coyote is already over the cliff, legs a-whirling, but uncomprehending his fate as yet.

There will be little recognition of this before the fact. There will be hints, warnings - wails from employers faced with rising wage claims, falling overseas sales. But the drunken binge of electorates high on the after-effects of a decade's now-toxic greenbacks will be quite unable to see that more dollars means inevitable failure, a domestic, systemic inflationary collapse. That the very volume of their output is what will cheapen it in the end. That the only market for their produce was a market powered by a ballooning USD-priced deficit, and that this market is already extinct - and the next-best-thing is a mere wading pool in comparison to the once-bottomless mid-Atlantic trench.

In fact, the likely local consensus view will be to misforecast, to overgear - to assume that more 'merkin dollars means more demand, and to reinvest and scale up production accordingly. Much like "executive apartments" at the height of the housing boom, recycled greenbacks will be force-fed to the boilers of whatever engines seem to create more of them more quickly by clever but greedy people acting stupidly and in concert.

Until one by one the producers starve on a diet high in bulk and low on calories. Goods exchanged for a promissary note that's hit parity with the '82 Mexican peso in purchasing power terms. Or goods exchanged for rising volumes of pesos, but in falling volumes. Either way, extinct.

When? If I could answer that, I wouldn't be posting here.

a lot of that is all well and good, but you would see re-pricing in euros, yen, or a basket before it came to that.

It is already starting. Like the stores in the news recently in New York accepting Euros as well as dollars.

not that some of the long term contracts and hedges won't be a problem, but this isn't a new worry for industry. it's been discussed for a few years now, with eyes on several countries waiting for them to drop dollar pegs and quit supporting the dollar.

any major industry that doesn't have some kind of plans in place by now, and they would be pretty few, probably deserves to go under.

Share this post


Link to post
Share on other sites

any serious company that sells something in $ that is not based in the US will have taken out currency hedges to prevent this problem - presumably we are talking about the $ going down the toilet here. If and when the contract expires they will either ask for a lot more $ or price in a different currency.

Share this post


Link to post
Share on other sites

After decades of inflation (unbalanced consumerism) across all sectors of the economy logic dictates that the next stage in the cycle will indeed be deflation. The worldwide housing bubble was simply the last phase of the global* boom that has been going on, with some set backs, since the last big bust in the 1930's.

The present levels of inflation are the dying embers of the boom cycle. The lag may be as much as 3 years or it could all happen quite quickly. IMO the feverish purchasing of gold is possibly the last symbolic fools rush into assetts that are inflating in this present long term economic cycle.

As the ancient Chinese philospher said: When you spend what you don't have you have to make up for it later.

_________________

* As in worldwide. The US is not alone in consumerism beyond its level of production.

Edited by Realistbear

Share this post


Link to post
Share on other sites
not that some of the long term contracts and hedges won't be a problem, but this isn't a new worry for industry. it's been discussed for a few years now, with eyes on several countries waiting for them to drop dollar pegs and quit supporting the dollar.

The problems are two-fold. One, any enterprise which has taken a till-now too-cautious stance by agressively hedging, has been vapourised by the market. Their sector peers' returns have ridden the boom, and their own have been lacklustre enough to lose investor interest. Either the heavily hedged, prepared producers have been de-capitalised in the market, their equity and debt traded as junk - or - they have chased dollar prices spiralling ever upward.

Two, the cautious (whether the too-cautious, above, or those paying the peer-group minimum requisite lip-service with weaker hedging) will rely on the hedging counterparties to make good. And the size of the emerging problem is in the end larger than entire markets, let alone individual insurance counterparties - there will simply be no way to make good on the Fed's ever-more-broken promisses. Which means that those who thought they were protected, already have the infection - time, and this tide will wait for none.

Finally - the national picture is distinct from the enterprise view. Sovereign governments can adapt in ways that enterprise cannot - they can dilute, or concentrate their own currency at will, in this global game of pass-the-black-hole. All that's needed is the will - and this forms within the electorate. Producers however cannot - they are committed, and bound by strictures of contract.

All they can do is default.

Share this post


Link to post
Share on other sites

Structural Concern #1: Dollars for Oil

Crude oil is priced in dollars. So as the cost for black gold rises, more and more dollars are sent to the world's oil producers. At this point, the largest suppliers are swimming in pools of green cash. And even though they keep filling up the pool, the value of their cash is being sucked down the drain.

The consequence: Oil-rich nations will start to unload their dollars.

And no matter what they trade into — euros, gold, or even granny smith apples — you can bet the dollar's slide will intensify.

Structural Concern #2: China Importing U.S. Inflation

China plays an awfully large role in U.S. trade. Large enough that it's important to monitor the changing dynamics between the two countries. Right now, China's currency is creeping higher against the dollar, as it is still pegged to the buck. That means China can buy less with its yuan. And the timing couldn't be worse: China is dealing with inflation of its own, especially in food prices. Every time the dollar falls, China's food and energy costs go even higher. So it's in China's best interest to let its currency rise at a faster rate. That would send inflation back where it came from — the U.S.

All of this could pressure the dollar even more!

The promise that money will continue to be pumped into the system has refreshed confidence in global growth and appears to have sparked new demand for hard assets.

Result: Commodity prices are moving higher while the dollar is moving lower.

The fear of irrepressible inflation is driving everything!

Hey, freeing up money for the American consumer and rescuing the credit market may seem like the right course of action to the Fed.

But they better stop ignoring the dollar's status as the world's reserve currency. If they continue down the path they're on, there could be severe implications that are hard to undo.

Bottom line: Inflation has crept back up on us, and the money pumpers are facing crunch time!

Share this post


Link to post
Share on other sites
any serious company that sells something in $ that is not based in the US will have taken out currency hedges to prevent this problem - presumably we are talking about the $ going down the toilet here. If and when the contract expires they will either ask for a lot more $ or price in a different currency.

Wouldn't these contracts become very expensive as demand for them rockets?

Edited by Ash4781

Share this post


Link to post
Share on other sites

Your thinking is to US/dollar-centric. I do expect what you have said to happen (not for a few years though), and I'm sure it will be incredibly painful for commodities (perhaps with the exception of physical gold) in the short term, but the underlying demand simply won't go away and the inherent value of commodities will quickly return when priced in other measures.

Under the circumstances described above, what asset, other than tangible goods, will retain any value at all? Cash, property, bonds, equities etc will all be toast, commodities will only be slightly singed in comparison, gold will probably go to the moon as a safe haven.

I fully expect the bull market in commodities to end in a bubble (the final bubble, in fact), but we are not there yet by a long way. When it does pop and true deflation takes hold, the economic game will have changed so much that in real terms those holding the commodities will fare better than anyone else. This will even be true for commodity-based equities, although the financial shock will initially hit them incredibly hard.

Share this post


Link to post
Share on other sites

A US perspective:

http://www.iht.com/articles/2008/03/02/bus...s/rtrecon03.php

ECONOMIC OUTLOOK
Central bank debate:
Is it inflation or deflation?
By Emily Kaiser ReutersPublished: March 2, 2008
WASHINGTON: In theory, a weakening global economy should cool demand and restrain high oil and food prices, which have raised the specter of 1970s-style stagflation.
In practice, shackling price pressures may not be that simple. The recent spike that has pushed up inflation in Japan, the United States and parts of Europe came despite clear signs of slowing economies..../

Global imbalances preventing recession from curbing inflation? A worst possible case scenario brewing as Chinese demand keeps commodity prices high while the West suffer with a major house price collapse and recession/depression. Or will China implode as a result of an overheated economy and shrinking demand for its goods as its customners cut back?

An unholy mess.

Share this post


Link to post
Share on other sites
Wouldn't these contracts become very expensive as demand for them rockets?

presumably if things happen as the OP suggests then there wouldn't be much warning, hence the cost of hedging would not reflect this outcome. Of course if and when this outcome materialises the company won't be hedging against a currency in freefall, they would be asking to be paid in something else.

Share this post


Link to post
Share on other sites
Your thinking is to US/dollar-centric.

The problem, and the market that formed it is entirely USD-centric. And so my thinking is naturally drawn to the problem-space, bound as it is.

the underlying demand simply won't go away and the inherent value of commodities will quickly return when priced in other measures.

This is why electorates the world over will be unable to see the problem until faced locally with high-wage, high-rent, rising-unemployment economies. With savings fully inflated away, just as the draw upon them needs to peak. Unbridled optimism in the ongoing saleability of their produce will produce this outcome, and there is little preaching to be done to the heathen to convert their thinking until all possibility of averting this passes.

But consider this. The rising demand for, price of produce is entirely determined by the ongoing ability of the USD-priced markets to extend their aggregate debt position. To make ever larger boasts about greater repayments, redeemable ever further in the future. Promisses underwritten by nations with a presently-insatiable demand for tomorrow's dollars. And this is the hole that the Treasury will attempt to fill with greenbacks, cheapening all that exist today and forevermore in the process.

Without these markets, built on a decade or more's faith in a strong dollar, and its retention of purchasing power for other inputs - the next-nearest are tiny. No other sovereign government is able to borrow with the strength of the US. No other sovereign government will ever again place so much faith in the debt issues of its neighbours. Whilst the demand does indeed exist, it does not exist with that depth, at that price.

But the model of today's production levels requires it. Models which dictate the volume and price at which break-even is passed, at which margin is maximised. And as these stresses deepen, producers will be unable to downshift quickly enough to meet the new market. Unable to reprice labour, energy, and rental inputs downward, to match purchasing power of selling prices. Unable de-gear borrowing, unable to downshift production in time to avoid bankruptcy on the back of marginal costs that were built for a world that's simply ceased to be.

Under the circumstances described above, what asset, other than tangible goods, will retain any value at all? Cash, property, bonds, equities etc will all be toast, commodities will only be slightly singed in comparison, gold will probably go to the moon as a safe haven.

Commodities are at the leading end of this. They will see the most severe compression, soonest. They are the most price sensitive, and the least finished, the least refined. Commodities, being essentially unfinished, have no barrier to market entry - we once swung from the trees, the evolutionists insist, sustenance farming our fermented figs in the sun. And so if import commodities become too expensive, domestic production of them, and falling consumption of them, will determine a newly viable price point.

Enterprises are not charities. The more such an input costs, the less a producer will consume of it, trimming production levels and raising prices, seeking efficiencies, and substitutes accordingly.

Some nations are more heavily reliant upon the importation of low order produce than others. Some add more value to the chain domestically, have lower consumption requirements (at current growth levels), are more energy and labour efficient domestically.

In a world glutted with commodities seeking any price, these nations will surely prosper.

Edited by ParticleMan

Share this post


Link to post
Share on other sites
presumably if things happen as the OP suggests then there wouldn't be much warning, hence the cost of hedging would not reflect this outcome. Of course if and when this outcome materialises the company won't be hedging against a currency in freefall, they would be asking to be paid in something else.

A little from column [a] and a little from column .

I'm not convinced that the commodities markets will wake up one morning to an ugly new reality. I think that the feed-through will be a grinding process that pierces defense upon defense, with poorly capitalised insurers (and their close cousins, the overgeared speculators) the first, early casualties. While the currency markets are inclined to price long term views into the immediate present, the commodity industries are almost literally the ore carriers of commerce. Which is partly why I see this outcome as now inevitable, and these enterprises as extinct (at today's production levels), unable to turn to meet the new market.

But this shoal of whales, when it does eventually turn, it turns as one. So irrespective of whether a given enterprise reprices its contracts in pesos or chocolate buttons, the new fix will reflect today's new reality, clearly signalled for all and sundry in USD-futures. But existing capitalisation ratios, existing costs, existing inputs, existing models, existing rates of production - are orphanned forever in the twilight-zone of yesterday's strong dollar, and what it could purchase.

And today you get far fewer chocolate buttons for your buck, but the number of hours taken to sweat it's constituents (from the cow and plantation) haven't changed at all.

Share this post


Link to post
Share on other sites

In the interests of donning the hair shirt, let's have a look at where we are since I started the thread...

usdx20090123ht1.gif

... well then. 'Nuff said. So the backside didn't exactly fall out of the USD. And while there's been some collatoral damage in the Fx sector (Hiscox for example got hit with £42m worth of losses, Indonesia slammed the door shut on the whole industry at the end of the year, and Indian firms are nursing some rather bad losses due to volatility), there's been nothing truly explosive on that front... yet...

Instead, the backside seems to have fallen out of USD-denominated demand; one assumes that the rest of the planet must now be finding itself in the curious position of competing for scarce dollars, driving their value up in the process.

Why? Well I'm open to theories, but mine is asset disposals; in particular, foreign direct investment built up over years in the US (particularly in financial stocks and investment-grade bonds) downweighting and selling; if there's any credence to this theory, then it tells us that there is a very nasty episode to come fairly soon in the Eurozone (particularly if combined with the simultaneous selloffs in equities and treasuries we've seen last week).

To put it another way, and to explain my rationale here a little - if holders of USD-yielding paper attempt to cram the exits then the money markets will quickly find themselves illiquid and start discounting the face value of the offered paper; the paper will literally be exchanged for substantially less actual cash than it professes to be worth; if these same sellers have funded their investment in something other than USD (foreign direct investment) then, I think, this may well put a curious train in motion where in order to crystallise a loss these same investors must purchase additonal currency to unwind their Fx position.

If this blind guess is even halfway correct it tells us two things :-

1/ Japanese banks are either not playing (leaving their losses to run), or, closing their positions at profit, or, both

2/ Eurozone banks are getting burnt, and badly

... which is an interesting line of thought to be getting on with.

Do share.

(hey, I've not been too far off what this meant for the resources sector, so far; so maybe half a point right out of three - that's doubled my long run average!)

Edited by ParticleMan

Share this post


Link to post
Share on other sites
logic dictates

we are way beyond logic now mate, remember calling the goldbugs insane when we said bernanke would cut rates (i remember you cheerleading for rises) he should of raised to protect the dollar but the goldbugs said he would trash it and guess what...

fannie and freddie etc the abomination of the TARP and now obama and his 3 million strong goverment goon squads paid for with freshly printed $.....

and your hero mervyn king is openly talking about QE...........game over.

oh and particleman just buy peter schiffs book crashproof. ;)

Share this post


Link to post
Share on other sites
(hey, I've not been too far off what this meant for the resources sector, so far; so maybe half a point right out of three - that's doubled my long run average!)

you did get the yen tip right on friday. i sold my gbp/yen puts this morning, and saved a packet as it has gone right back through the day

Share this post


Link to post
Share on other sites

Rogi - thanks for the bits, interesting read.

Obviously I'm not entirely convinced with the conclusions but the case was very well researched; the thing I struggle with is that Chinese inflation will taper inward investment rather than increase it, and, higher output prices for consumer goods of Chinese origin (which is what some of the final few paras deal with) will come at the cost of further demand destruction (just ask your average North Korean how this bit works in practice).

In a sense China can export inflation, but only in so far as permitting production of competing supply to restart in the West (and this is obviously likely to be a drop in the bucket in the immediate future).

Still, a good read - I can appreciate why the author's taken the view they have, even if I disagree with the vector these forces introduce.

Now that's out the way - on to more interesting things.

I bounced this idea (of Eurozone stress building up toward some interesting fireworks) off a few other people hoping to thoroughly discredit the notion; unfortunately, one of them pointed out that this scenario also happens to explain the spike in PM's, while another pointed out that either of two reasonably large Swiss investment+retail banks (and I'm guessing half the forum could reliably take a stab at which), or, perhaps a handful of French, German, and Italian banks (assorted private and investment) could produce sufficient stress to move all of these markets in this way.

I hate it when I'm trying to be all doomy and people agree...

Edited by ParticleMan

Share this post


Link to post
Share on other sites

AS long as commodities is priced in dollars the commodity boom will be over once the US choose to have a strong dollar policy. That will happen when their debt is debased enough, and inflation becomes a political problem.

Share this post


Link to post
Share on other sites
Guest Steve Cook
The problem, and the market that formed it is entirely USD-centric. And so my thinking is naturally drawn to the problem-space, bound as it is.

This is why electorates the world over will be unable to see the problem until faced locally with high-wage, high-rent, rising-unemployment economies. With savings fully inflated away, just as the draw upon them needs to peak. Unbridled optimism in the ongoing saleability of their produce will produce this outcome, and there is little preaching to be done to the heathen to convert their thinking until all possibility of averting this passes.

But consider this. The rising demand for, price of produce is entirely determined by the ongoing ability of the USD-priced markets to extend their aggregate debt position. To make ever larger boasts about greater repayments, redeemable ever further in the future. Promisses underwritten by nations with a presently-insatiable demand for tomorrow's dollars. And this is the hole that the Treasury will attempt to fill with greenbacks, cheapening all that exist today and forevermore in the process.

Without these markets, built on a decade or more's faith in a strong dollar, and its retention of purchasing power for other inputs - the next-nearest are tiny. No other sovereign government is able to borrow with the strength of the US. No other sovereign government will ever again place so much faith in the debt issues of its neighbours. Whilst the demand does indeed exist, it does not exist with that depth, at that price.

But the model of today's production levels requires it. Models which dictate the volume and price at which break-even is passed, at which margin is maximised. And as these stresses deepen, producers will be unable to downshift quickly enough to meet the new market. Unable to reprice labour, energy, and rental inputs downward, to match purchasing power of selling prices. Unable de-gear borrowing, unable to downshift production in time to avoid bankruptcy on the back of marginal costs that were built for a world that's simply ceased to be.

Commodities are at the leading end of this. They will see the most severe compression, soonest. They are the most price sensitive, and the least finished, the least refined. Commodities, being essentially unfinished, have no barrier to market entry - we once swung from the trees, the evolutionists insist, sustenance farming our fermented figs in the sun. And so if import commodities become too expensive, domestic production of them, and falling consumption of them, will determine a newly viable price point.

Enterprises are not charities. The more such an input costs, the less a producer will consume of it, trimming production levels and raising prices, seeking efficiencies, and substitutes accordingly.

Some nations are more heavily reliant upon the importation of low order produce than others. Some add more value to the chain domestically, have lower consumption requirements (at current growth levels), are more energy and labour efficient domestically.

In a world glutted with commodities seeking any price, these nations will surely prosper.

You seem to be operating on the erroneous assumption that commodites, in particular essential commodities have no intrinsic problem of supply in relation to the essential demand for them. From that assumption it is an easy step to the rest of your analysis.

Your underlying assumption of a lack of a problem of essential supply easily and always meeting essential demand....is simply wrong

As for all non-essential commodites.....I would pretty much go along with your demand destruction analysis

Edited by Steve Cook

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 295 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.