STAFF NEWS & ANALYSIS
CFR Tells US Good News About Commodity Prices
By Staff News & Analysis - March 27, 2013

Energy, Security, and Climate … CFR experts examine the science and foreign policy surrounding climate change, energy, and nuclear security. Bad News for Pessimists Everywhere: Malthus Was Wrong … There is a tempting intuition to the idea that the real prices of non-renewable goods like coal, iron ore, or oil should rise, more or less, forever. It's an easy argument to make, and it sounds right … Supply of the stuff is limited—once it's gone, it's gone. So, this argument goes, as we exhaust our resources, we'll have to mine, drill, or otherwise get our hands on it somehow but it will get more and more expensive to do so, because we'll have exhausted the best stuff. Left to exploit ever-greater quantities of ever-more-marginal deposits, prices will rise indefinitely into the future. – CFR blogs

Dominant Social Theme: It's running out.

Free-Market Analysis: The Council on Foreign Relations deservedly or not has a reputation in "conspiracy circles" for being an elite facility that has considerable influence on US policies. But leaving that aside, the CFR often provides support for free-market arguments. Such is the case in this article, excerpted above.

The article does us the favor of pointing out an Economist analysis that shows commodity prices are trending down historically. You would not know this from many articles written in the mainstream media and even in the alternative media.

Left alone, untrammeled by regulations and price manipulation, commodities SHOULD go down in price over time as technology becomes more efficient and discoveries become more prevalent. Here's more from the article:.

One of the most powerfully counter-intuitive and empirically conclusive findings in economic history is that the real prices of nearly all major resources have actually trended lower over very long periods of time, even if they're produced at higher and higher rates. (Oil, once OPEC got involved, is the glaring exception. But even oil prices since OPEC came about haven't simply climbed higher and higher as global consumption has grown.) Though non-renewable commodity prices can rise steeply over years or even decades when supply and demand conditions warrant, over the centuries they've tended to decline after adjusted for inflation.

The Economist industrial commodities index, first published in 1864, is widely considered to be the world's oldest public, regularly updated price index. Though the nominal index stretches back to 1845, data before 1857 are incomplete and data between 1857 and 1861 reflect January prices only. Only figures from 1862 onwards,which represent averages of the underlying monthly figures, are used here. They are deflated using U.S. consumer price index data since 1871, which is used in the Case-Shiller historical home price index. (The message in the data is the same regardless of whether they are deflated by the U.S. consumer price index or the U.S. gross domestic product (GDP) deflator, as some prefer.) …

The trend is clear: Raw materials prices show a secular deterioration relative to manufactured goods over long stretches of time. Since 1871, the Economist industrial commodity-price index has sunk to roughly half its value in real terms, seeing average annual compound growth of -0.5% per year over the ensuing 140 years. Even after the boom years of the 2000s—in 2008, for instance, as commodity indexes soared, the Economist index never climbed more than halfway above where it stood 163 years earlier, in real terms.

This is a good and pertinent analysis. There is so much that is financially illiterate in the news media these days and this story is a ringing affirmation of a different perspective.

On a related note, we would like the CFR blog to expand its analysis to money stuff itself. The faith in free markets that is so nobly presented regarding commodities is not shared apparently when it comes to currency dissemination throughout the Western world. If the marketplace is so effective at creating prosperity within the context of commodities why isn't the Invisible Hand trusted when it comes to banking?

Central bankers fix the price of money and its volume as well. They are constantly involved in the very kind of price-fixing this article criticizes and makes clear doesn't work.

Our question as always is why there seems to be such a disconnect between appreciation of the free market properties and its ability to efficiently manage money? Free banking is infinitely preferable to the series of catastrophes that central banking provides.

Since CFR blogs seems to be a launching pad for a renewed appreciation of market forces we look forward increasingly to an investigation of the central banking model itself and how it has managed to invade nation-states around the world.

After Thoughts

Price fixing never works, as economists agree. So why is it practiced by central bankers everywhere?

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