For those of us taught neo-Keynesian in college, monetarist in B-School, and libertarian in life -- we are discovering that these do no longer are very relevant in driving business cycles.
They do seem effective in creating big governments that spend inefficiently, massive distortions in asset pricing, and creative risk takers that beat the system (at the system's cost).
My small voice is that business cycles are now driven by input costs . . .
We are familiar with the oil crises and more recently shortages of food that caused rioting around the world. Commodity prices seem to fluctate with Chinese economic conditions. And growing economies are betting heavily in raw materials -- from energy, iron ore, and increasingly water.
In the relatively quiet Asian front, "war" is now breaking out over ownership of small islands in the middle of the ocean. I think most realize that much of this involves ocean bed mineral rights.
I suppose in most ways -- this is all natural supply-demand reactions. The biggest distortions are caused by speculation -- fueled by low margin requirements and low cost of money. I would hope that financial regulations will increasing focus on the impact of speculation on distortion and volatility of commodity prices.
So we have seen:
- Economic recovery seemingly quashed by rapidly rising gasoline/oil/energy prices.
- Business profits negatively impacted by raw materials/ingredients prices, even as sales only begins to pick up.
- Economies and currencies like Australia and Brazil buffeted by commodity prices.
- Fight between food and energy (e.g., ethanol production).
- National and global disasters from nuclear energy production.
- And very basically, huge bubbles created by the Fed and other bankers manipulating interest rates and other monetary measures.
It would seem self-evident that commodities (and other inputs) that are driving and causing cycles.
[Please see following post on "Unified Mandate for the Fed".]
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