Tuesday, July 15, 2008

Congress And Everybody Else Looking For A Culprit For Rising Prices

My web-trekking explorations are back on economics. The self-educational pursuit has to stop during my time in Nanjing, China because for various reasons I can't get to the Berkeley macro-economics videos that I had been following. There are though a number of posts from other sites that provide me food for thought.

It may seem obvious that there is a difference between economics and business, though coming up with a quick answer may not be that easy. Perhaps it's the difference between recession and depression, it depends on whether it's happening to you or other people.

Is it Inflation or a Bubble? is an economic question asked by the Small Business Trends expert Anita Campell.

Rising prices hurt us because we are people … consumers … above all else.

But as businesspeople, the situation can be even worse if you happen to be in one of those businesses that use the commodities and materials experiencing record-high prices right now.

This is a direct business concern, creating what could turn into a vicious cycle as those higher prices are passed on to the end-use consumers with little supposed benefit to the business producers.

Think of food (restaurants); gasoline (businesses with fleets and delivery vehicles); and high heating costs (landlords and real-estate related businesses).

She asks the larger economic question whether inflation was the real worry, rather than recession. But after digging into the question a little further, it appears that the question of high prices is more complex than simply inflation.

Charles Schwab Town Hall meeting, Chief Investment Strategist Liz Ann Sonders suggesting that there is a bubble taking place in commodities, spurred partly by speculators. That seems to be contributing to the rising prices of certain categories such as food and gasoline. (She mentions commodities speculation in this Wall Street Journal interview, too.)

Ms Campbell goes on to address another economic question. Consider this: while the prices of food and fuel have skyrocketed, the prices of some things keep coming down. It's not a question of inflation across the board. It's really a matter of some things being at record highs, and others being at record lows.

What do you think is happening? Weigh in with your opinion about: Technology Prices Defy Inflation (So Far)

The area she focuses on for this crowd-sourced analysis is technology. My hypothesis is that its the ability of technology to increase productivity following Moore and other so-called laws. As long as this happens there will be lower costs, though how long this will happen is another technical question. It is also how business people from entrepreneurs to secretaries in corporate offices use this technology. That according to the Berkeley macro-economic class is where the majority of the productivity boost comes from.

But what happens to tech productivity if you can't feed those enginners beer and pizza.

Back to the direct business concerns.

Consequently, some small businesses are being hurt more than others in the current environment. If your business happens to depend heavily on commodities — say you run a pizza shop and depend on flour and cheese — you are being hit hard. But if you are in a business that relies primarily on technology, then your costs of doing business may be low.

Ms. Campbell is not alone is looking for culprits for rising prices, according to this New York Times article BUSINESS June 25, 2008 By JAD MOUAWADs, Congress Looks for a Culprit for Rising Oil Prices. This expert doesn't follow the same line of thinking as Strategist Liz Ann Sonders when it comes to oil prices.

A pre-eminent energy expert is to testify on Wednesday before lawmakers that the suspicion that investors are a large cause for skyrocketing oil prices is misguided.
"Everyone would like to believe that there is a silver bullet — like a bubble or speculation — that can solve our oil problem," he said. Instead, he said, it would be better for the nation to focus on conserving energy and reducing its oil consumption.

My last post looked at the effect of the commodities upheaval on the poor. The Financial Times article Food crisis is a chance to reform global agriculture, cited in the post, provided additional insights from a number of economists including Paul Collier and Bart van Ark who wrote in response to the article.

We need to examine the two phenomena – increased shortages due to a decline in the growth of supply, and price increases related to speculation and securitization of several commodities – in conjunction to fully understand what has happened and what is likely to happen next. There is no question that the securitization of various food commodity markets in early 2007 has played an important role in this crisis, especially over recent months. The mean of the price increases of securitized agricultural commodities (including coffee, cotton, soybean oil, soybeans, sugar, wheat, and corn) was 49 percent in the 15 months from January 2007 to April 2008, compared to 20 percent in the preceding 12 months. In comparison, prices of non-securitized agricultural commodities (including, rice, tea, cocoa and rubber) increased by only 14 percent in the last 15 months, compared to 11 percent in the 12 months before.
Despite the slower average price increase, the effects of speculation do appear to have spilled over into some of these non-securitized commodities, for example, to rice (69 percent since January 2007) and palm oil (88%). One should also ask, as Martin Wolf does: If this is truly a speculative bubble, where are the stocks of these goods? The answer is in part: still out in the fields, as future contracts deal with future harvests. In all likelihood, some of the recent price jumps stems from the perception among hedgers and investors that the harvests will disappoint.

The author of the FT article Martin Wolf, FT associate editor and chief economics commentator, argues that while:

I am grateful to Bart for his comments on securitisation and prices. I should note, however, that if futures prices are jumping because of the perception that harvests will disappoint, this is stabilising speculation. It acts to lower consumption now, thus preserving stocks.

I am unclear on how this happens unless the end user has transparent information that this is going to happen. So far, I don't see that being the case. Another philosophical and ethical question it raises for me is if the so-called speculator realizes through more insightful analysis and precise information the actual market value of the product is he gambling? Yes, there is risk, but there is a difference between statistical knowledge to understand and using tea leaves to assess the unknown. No doubt though that once somebody does benefit from a deeper understanding of the market, they are followed by those who jump on the bandwagon long after the music has stopped playing.

To finish off, I am throwing in the comments from Paul Otellini from this interveiw in the New York Times TECHNOLOGY section on June 1, 2008. You have the business, the technology and the price of oil all combined together.

Bits: Intel's Chief on Strategy, Globalization and the Price of Oil Steve Lohr
In a wide-ranging interview, Intel Chief Executive Paul Otellini talks about Intel's move into processors for smaller machines, the company's new chip plant in China, the challenges of programming many-core processors and the economic impact of the rising price of oil.

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