February 18, 2011 | Stratfor
French President Nicolas Sarkozy sent a message to G-20 finance ministers and central bankers meeting in Paris this weekend, calling for efforts to rein in commodity speculators. But STRATFOR’s Peter Zeihan argues that governments and central banks bear some responsibility.
Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.
Colin: G-20 finance ministers and central bankers are meeting in Paris this weekend against a background of sharply rising food and commodity prices. Earlier this week, the World Bank’s chief, Robert Zoellick, warned that food prices were at dangerous levels and have pushed 44 million more people into poverty in the last nine months. G-20 is currently chaired by France, and France’s president, Nicolas Sarkozy, has struck a characteristically populist note by urging commodity speculators be reined. But is it that simple? Might not governments and central banks bear some responsibility?
Welcome to Agenda, and this week I’m pleased to welcome back Peter Zeihan. Peter, commodity prices have become very volatile, many rising well above inflation levels, particularly for food and some minerals, and seem to bear no relationship to supply and demand.
Peter: Commodity prices are something we keep a close eye on here at STRATFOR, as they have a huge impact on industrial growth and honestly just flat out social stability; if a country can’t feed its people, it tends not to be a country for very long. However we have not actually done predictions on commodity prices for several years, and here’s why. There have been a number of changes in international financial markets over the last decade, but the one that impacts commodity prices the most is the simple fact that there is a lot of credit out there and has been for the last 10 years. The biggest change in the last 10 years is the onset of a very different type of credit cycle. The amount of capital and credit available in the system overall has just expanded logarithmically.
Colin: And why is that?
Peter: Mostly it’s due to the aging of the baby boomers. You have an entire generation, the largest generation in American history, that is all closing in on retirement, so they’re saving up huge amounts of capital and that puts so much money into the system. Another factor is that Asian savings for the first time are actually able to tap the international market; so all the overproduction in Japan and China — the money that it’s generating is mostly flowing back into global supply. But probably the one that is most applicable for today, and really for the last four years, is going to be the money supply of the various major economies. Now the United States catches a lot of criticism for what it’s doing with something called quantitative easing, which is a fancy way of saying that it’s printing currency in order to help bolster asset values here in the United States. And the United States is committed to printing up to $50 billion a month for the next seven months; they started this back in November. What most people don’t realize is that the United States is hardly the only country in play here. The U.S. money supply has expanded by about 17 percent over the course of the last four years. But if you look at everybody else, you’ll notice something very interesting. European, Japanese and Chinese money supply have all expanded by more. In fact, Chinese money supply has more than tripled over that same time period. So of about the $17 trillion of U.S. dollar equivalent that these four countries have added to the money supply, the United States is actually responsible for a very small percentage of it. All of this money has to go somewhere. Now, the countries do this for various reasons. For the Europeans, it’s to try to stabilize their banking sector; for the Japanese and the Chinese, it’s in order to make sure that the banks have sufficient cash so they can subsidize their various industrial sectors that are noncompetitive. But not all of the money stays where it’s intended; a lot of it does make it into investment markets. And so, yes, the U.S.’s expanding the money supply does have an impact upon food prices and oil prices, pushing them up, but not nearly as much as the euro or the yuan.
Colin: So, you’re saying this means more money splashing into investments like commodities. But it used to be the case — the argument, if you like, about speculation — that the more liquid the market, the more reliable the market price as a guide to value.
Peter: Well, certainly the more individual players you have, the easier it will be for prices to settle at some sort of equilibrium. What we are dealing with here isn’t simply more players, but an absolutely massive surge in the amount of capital that is available from two forms. One of course is legitimate forms that people have saved for their own retirement or for any other reason. And two is just this massive money that the various center banks have been pushing into the system. The issue is not so much the number of players, although that does complicate the picture, but just the sheer volume and velocity of money that has entered the system right now. Various central governments have decided that increasing the money supply is a way of smoothing over all of the problems from the financial crisis from late 2007 all the way up to the current day. There is no sign that any of the major central banks are going to change this policy. If you look at the chart, you’ll notice that the Chinese money supply has actually been increasing almost exponentially over the course of the last six or seven years. They need this just to keep their system afloat, and a lot of that money is simply feeding right back into commodity prices.
Colin: Do you see this as a short-term phenomenon?
Peter: So long as you have a sovereign debt crisis in Europe, and so long as you have a Chinese system that is not competitive in the traditional sense, this is a factor that’s going to stick with us for quite some time. Now, if the debt crisis in Europe breaks and the euro goes away, and if the Chinese collapse under their own contradictions, all of a sudden those two central banks are actually gone. And you could go, in theory anyway, back to something that’s a little bit more normal.
Colin: Organizations like the Bank for International Settlements and the IMF will be aware of this, but what can they do about it?
Peter: Yes, I believe that they are aware. Unfortunately, there’s not much you can do to tackle it. From the European point of view, they are doing this in order to maintain the stability of their government debt markets and their banking sector. They will not change this policy because they see it as their lifeline. For the Chinese, this is how they maintain social stability. They’ve probably exhausted their depositor base and so they have to print money in order to keep their banking sector liquid. Should they stop, they’ll be dealing with a nationwide revolution. Against that sort of core interest, it’s difficult to imagine organizations like the IMF or the World Bank or the BIS having any lever that can be used. This is the new normal for now.
Colin: Fascinating, Peter. Thank you very much. Peter Zeihan, ending this week’s Agenda. Thanks for being with us until the next time. Goodbye.