POLITICAL ECONOMY
1980s. It seems that monetary authori- responded by vigorously supplying liquidity to the financial markets,
ties have learned a great deal about to try to limit the effects on the real economy of this constriction. It
how to preserve long-term price stability will be critical to see if the central banks can first engineer a success-
insofar as is possible. ful containment of the financial market problems and later sterlise
As a result, the world economy has the inflationary risks related to the provision of such a massive
avoided major recessions since amount of liquidity.
1980/82. That recession was the worst
(post-WW II) on record. It came at the Not All Trends Are Good
end of a financially turbulent era which Many of the trends in the world today bode well for worldwide eco-
saw double-digit inflation, two oil price nomic, social and political development. Others do not. One must
spikes and four severe downturns with- avoid the rosy New Economic Paradigms that at times paint too san-
in 12 years. Since then we have seen guine a view of a future void of recessions, inflation, financial mar-
two short, shallow recessions. Major ket volatility, wars, repression, and other social plagues. There are
economic crises have been avoided, risks facing global economic prosperity today, and in the future.
despite a series of financial and govern- Modernity is not assured. Things can reverse, and they do. The posi-
mental problems – the 1987 stock mar- tive developments that we see today can be delayed and totally
ket crash, the 1997 Asian currency cri- derailed. An unforeseen future may emerge.
sis, the 1998 Russian debt problem, and Some people actively work against globalization and modernisa-
the 9/11/2001 attacks. tion, not just militant Islamists, but also the present US
In the past, any or all of these events Administration. It came to power on a platform that called for the
could have been expected to precipitate dissolution of all multilateral post-war international treaties and
major economic turmoil. None of them agreements to which the US was party.
did, in part because of facile monetary Even in the absence of such active opposition, the sheer enormity
authorities which provided the neces- of moving 5 billion people economically onward and upward some-
sary liquidity to avoid crisis turning to times runs into economic, political, and social obstacles. No one has
recession, and then sucked the excess ever tried to engineer and maintain such a broad economic develop-
liquidity out of the world economy as ment programme before and the potential for it to succeed with or
soon as the crisis had abated. It is a without centralised guidance is untested.
practice first demonstrated under Fed The future of Chinese economic trends is also not assured. The vast
Chairman Paul Volcker in 1982/83, and majority of Chinese citizens today are yet to benefit from economic
it has worked like a charm ever since. expansion. There are tens of thousands involved in protests, demon-
This often over-looked development – strations and riots each year. They are calling for the restoration of
monetary authorities working more citizen’s rights to property use, healthcare, and other social benefits
effectively than in the past – has been that have been abrogated in the current economic rush to develop-
instrumental in sustaining the strong ment. The Chinese phenomenon, while seemingly unstoppable, could
overall economic expansion we have be derailed.
witnessed worldwide since 1983.
This suggests that both the hyper-
Many of the trends in the world today bode
inflation and the deep recessions of the well for worldwide economic, social,
past may be avoided in the future, bar-
and political development
ring a breakdown in international mon-
etary cooperation on a worldwide scale. The Chinese government is well aware of this, which is one of the
It does not mean that inflation and reasons why it is trying to move so fast. It knows the risks of reversal
recession have been banished from the during the transition period, and knows that the best approach to
economic system, nor that worldwide minimising this risk is to try to bring at least some economic benefits
economic cycles are a thing of the past. of the transition to as many citizens as possible, as fast as possible.
It means that the cycles may be more
muted and less destructive than they What All This Means for Metal Markets
were prior to 1983. The most obvious consequence of the growth in the world economy
This thesis is being tested as this arti- due to globalization and economic liberalisation has been a sharp
cle is being written. Financial markets increase in the demand for most commodities as growing numbers of
have been roiled by a constriction of people become consumers financially capable of purchasing a wide
credit to highly leveraged private equity range of manufactured goods and services. This is a trend that has
and hedge funds, just as problems in already had seismic effects on commodities demand over the past
the US subprime mortgage market decade. More importantly, if these trends are not reversed by any of
have added to the financial constraints. the counter-veiling influences, the movement of more people into the
The resulting deleveraging by these consuming classes should continue for decades to come – with the
funds pushed most asset prices sharply effect of steadily increasing demand for commodities at a faster pace
lower in August. Monetary authorities than has been the case over the past four decades.
50 SEPTEMBER 2007 COMMODITIES NOW
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