So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.
God forbid that money be fungible and find it’s way into commodities. God forbid this be helped along by the immense pump-priming that the federal reserve is engaging in.
And yet in the world outside the Grey Lady, policymakers are becoming critically concerned about rising commodity prices. Yes I know they are always volatile, and yes I know that resources are, in some sense, finite. But I hardly think that makes it certain that third-world demand exclusively is fueling rising energy and food prices (and they are rising).
Keynesians who are obsessed with aggregate demand can only write the graph above off by saying that China is squeezing the world. Maybe it is. I don’t have data on capacity or current supply fluctuations right now, and am not prepared to do a short-run macroeconomic model on supply/demand disequilibrium. So it is entirely possible that we are in a short-run demand squeeze and all of this will go away, in spite of the trillions of extra dollars circulating in the economy. While I don’t believe that to necessarily be true, I won’t preclude the possibility I am wrong (unlike some economists).
But it is intellectually dishonest for Paul Krugman to use inflation — something that hurts people and erodes the value of their wealth — as a sign that we must fundamentally alter our resource consumption. Yes, in some ultimate sense, resources are being depleted. But in an economic sense, energy is far more abundant today than it ever has been.
True or false: there’s more oil today than a hundred years ago.
True, in any meaningful interpretation. And it’s not just oil. Gains in natural gas extraction mean that there is twice as much gas in the world today than we thought even a few years ago: enough to last 250 years.
As technology improves, so does the amount of proven reserves. All of this may change one day, but for the time being, there is NO indication that the world is losing any of the energy-dense resources it relies on.
Given that an energy shift constitutes a long-term structural change to the macroeconomy, and that China has for some time been demanding high levels of energy, I find policies promulgated by the central bank of the world’s reserve currency a far more likely short-run inflation culprit than aggregate demand. Again, I could be wrong.
What seems fairly certain, though, is in Paul Krugman’s world, money is the only expanding resource. It’s neither this world, nor one we want to live in.