Why monetary expansion shoots up commodity prices?

[eugenekop]

Appreciate your answers.

[tod evans]

Same amount commodities, more money.

[presence]

Catalysed by commodity futures market

http://www.dummies.com/how-to/conten...endencies.html

As a general rule, futures prices respond to inflation. Some, such as gold, tend to rise; others, such as the U.S. dollar, tend to fall. Here are the basics of money supply/commodity tendencies:

• Metals, agricultural products, oil, and livestock contracts generally tend to rise along with money supply.
• Generally, bond prices fall, and interest rates or bond yields rise in response to inflation.
• Stock index futures are more variable in their relationship with the money supply, but eventually, they tend to rise when interest rates are falling, and they tend to fall when interest rates reach a high enough level.
• Currencies tend to fall with inflation.

In a global economy, many of these dynamics occur simultaneously or in close proximity to each other, which is why an understanding of the global economy is more important when trading futures than when trading individual stocks.

So even though YOU may not have more money after a QE or other money supply increase: The market realizes that the total economy has more money nearly instantly in the commodity futures markets.

[acptulsa]

Monetary expansion shoots up all prices. Monetary expansion shoots up no prices.

Using money is no different from bartering. Once upon a time you could get quite a lot by trading a typewriter for it. Now you can barely trade a typewriter for a cheeseburger. Why? Because the computer made all the typewriters essentially surplus and nearly worthless.

Well, the Fed has made the dollar nearly worthless by vastly increasing the surplus. The commodity is worth what the commodity is worth. Only the dollar has changed.

Do FRNs outnumber tree leaves yet?

[Carehn]

Works in many ways.

The best way to understand this is to think of the dollar as a stock in companies. If they split the stock (double the amount of shares) then every share is worth half as much so can only buy half of the commodity it could have before the split. Only when a stock is split every stock owner gets double the shares they had. When they print a dollar it has the same effect only they do not give you any more dollars to replace your loss of value. Only the Bank gets the new dollars.

Now because the bank has yet to spend the new cash prices do not rise right away. The new cash allows the fed to lower interest rates because banks in theory will borrow more money with an interest rate of 1% then they would at 2%. So when they say lower interest rates they mean print more money. It is important to know that in a free market Interest rates would be set by the market and the market or banks would set interest rates based on the money they had on hand to loan. Less money would drive interest rates up wile more would drive them down as banks seek to be competitive. Lower rates = more loans.

So when they set interest rates as a % that is less the the market would it means they must print cash to make up for the demand created artificially because that % indicates to the banks more cash on hand then there actually is. And this my friend spells trouble. All that cash really only represents good and services, or commoditys if you will that don't actually exist. So the market starts building and buildings crap it cant really afford, see the housing bubble for good example.

Now when the banks get this new money they lend it and this is where rising prices become hard to track because they do not all rise equally. Big business and big government get the money (or most of it) first, so what every they are interested in goes up in price the fastest. School, healthcare, housing, and then the commoditys used most in those fields begins to go up faster then others.

It never is the same because the market is always changing but rising prices eventually effect every portion of the market like ripples in a pond. From a freight train of phosphate all the way down to your little brothers dime bag.

And whats worse is the energy, commoditys, and time that the market did really have are spent on crap it really didn't want or need.

Its F7cked up when you really start to think about it.

[presence]

Do FRNs outnumber tree leaves yet?

Interesting question.

Total dry weight per acre of average cover... lets say 3 metric tons.
2.3 billion acres in US

6.9 Billion Metric tons of leaf matter


A million bucks weighs a metric ton. http://www.fivecentnickel.com/2006/0...dollars-weigh/
M1 after adjustment is actually 170% higher at $2,918 billion. http://www.fgmr.com/us-dollar-money-...rreported.html

2,918,000 Million Dollars in supply

2.9 Million Metric Tons of money in supply

2379 times as much leaves as FRN's

so not yet. Maybe next year.

[acptulsa]

so not yet. Maybe next year.

Sounds like three months, not a year. I think this winter will make the leaves more dear and rare than FRNs.

[MozoVote]

One of the best quotes from the dot-com bubble I'll always remember is: "There is no inflation, because all the inflation is in the stock market". When there is excess money, the greater fool theory is set in motion somewhere. But it's not necessarily going to appear in consumer goods inflation. At least, not right away. But if traders think that gold and silver have become "played out" and move into basic commodities that are needed for everyday things, look out...

[eugenekop]

I should have mentioned that I am a versed libertarian and supporter of the Austrian school of economics. Naturally I know that inflation increases all prices. My question was why commodity prices are increased significantly more than others. For example why oil, food and farm prices went ballistic while most other prices have increased only in single digits?

[Danan]

I should have mentioned that I am a versed libertarian and supporter of the Austrian school of economics. Naturally I know that inflation increases all prices. My question was why commodity prices are increased significantly more than others. For example why oil, food and farm prices went ballistic while most other prices have increased only in single digits?

Could be that production got more efficient in the consumer goods market than in mining/drilling. There is no way to isolate the effects of monetary policy from other changes in the economy though.

Or there is more increased global demand in commodities than in consumer goods (should be true for China), or plenty of other reasons like the composition of capital, different time horizons in the production process and the importance of the interest rate, etc.