We've talked before about whether policymakers have overstimulated U.S. demand relative to our capacity to supply. What if it's happening at a global scale?
Goldman's Jeff Currie recently spoke about the reasons why commodity prices have spiked even higher this year than expected on the rebound in demand. One of the biggest factors, he said, is that populist "redistribution" policies have been "much more broad-based and global" than they expected. Latin America has moved to the left this year, Germany appears to be drifting that way post-Merkel, China has its "Common Prosperity" drive, the U.K. has its "Levelling Up" initiative.
And even in the U.S., the fiscal stimulus Biden signed into law in March was much bigger than expected; $1.9 trillion, versus the $1.1 trillion or so that analysts originally thought. Think about that--the increase in the size of the package was greater than the entire $787 billion stimulus bill President Obama signed in 2009 to support the economy post-financial crisis.
The result has been a massive increase in real demand for physical goods. Demand for gasoline this summer hit not just a post-pandemic high, but an all-time high, notes Currie. Spending on goods in the U.S. alone is 20% higher than it was before the pandemic! This defines a commodities "supercycle," which, according to Currie, is "a structural rise in demand." And yes, he thinks we're in one.
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You can get bull markets here and there from supply shocks (like a drop in Saudi oil production). But you can only get broad commodities supercycles from a structural increase in real demand. And this, Currie adds, can only come from lower-income populations, which overwhelm the world's wealthy in terms of their sheer size. Here's how he explains it:
"What do the world's rich control? Dollars. Can they create GDP? Yes. But can they create physical goods inflation? Numerically impossible. There's not enough of them. Only the world's low-income groups can create inflation and commodity bull markets and there is no exception to that. You cannot find me an exception."
Even the 1970s inflation, Currie says, can be tied back to LBJ's "Great Society" policies in the 1960s (which included Johnson's "War on Poverty" and the creation of Medicare and Medicaid). President Biden's agenda is often thought of in a similar way--but it may be that the Covid response has already supplanted the targeted spending efforts Biden had in mind.
In the U.S. today, "low-income" describes 44% of households, or some 50 million people, according to the official stats. Now add in the rest of the world, and look at what's happening in commodities--oil is at $85 a barrel now, a fresh seven-year high. Wheat is at a ten-year high. The CRB "Raw Industrials" index, covering burlap, tallow, cotton, tin, and wool, among others, is at an all-time high.
So yes, policymakers worldwide seem to have already succeeded in redistributing wealth to lower-income populations that are now driving a massive increase in physical demand. But it's a lot easier to spark a 20% increase in demand than to bring on a 20% increase in supply, especially during a pandemic. So the result is price spikes, shortages, and generally less satisfaction than you might expect.
The quicker more supply can be brought online, the sooner prices will stop surging, and the better off the population will truly be. Otherwise, price spikes themselves could cause a recession that falls hardest on the lower-income groups that redistribution was most meant to help.
See you at 1 p.m!