The Idiot's Guide To Blowing Bubbles

When the Fed prints money and buys government bonds, investors holding those T-bills can sell them at a higher profit and avoid lower interest rates by moving their money elsewhere. The Fed wants to chase investors out of the bond market and into risker assets. Investors will thus move their money into commodities, stocks, emerging markets and other currencies (via the carry trade). That is the theory as laid out in Ben Bernanke's forthcoming book The Idiot's Guide to Blowing Bubbles, and it is working perfectly—

Strong demand for raw materials from emerging markets and a flood of money promised by the U.S. Federal Reserve are pushing commodities prices to new highs.

The broad rally has gained steam since the Fed indicated in late August it would inject money into the U.S. economy. But the gains also reflect a powerful rebound from the financial crisis in China and other fast-growing markets. These forces may send prices higher still, potentially putting pressure on poor importing nations...

Commodity prices largely continued a march toward new multi-year records. Copper climbed 2.2% Tuesday and is just pennies from an all-time high. Gold settled at $1,409.80, a new record, and cotton is at its highest in more than 140 years (though neither is near its inflation-adjusted peak). Corn has risen 22% in less than six weeks.

Copper prices (hat tip, Tim Iacono) have risen to $4/pound for the first time since the spring of 2008 (a 28-month high).

Though you wouldn’t know it from the graphic [below], recall that commodity prices surged in early-2008 prior to the financial market collapse later in the year, metals reaching their highs in the spring (copper at about $4.25 in May) while energy prices peaked in July. The price of crude oil is worth keeping a close eye on at this point, however, the big difference between 2008 and 2010 is that, back then, it was run-away demand from Asia that threatened energy market stability. Today, it’s run-away money printing by the Fed.

As I write this, a barrel of crude oil on the NYMEX is selling for about $87. The price has finally broken out of a resistence level (ceiling) of $83-84 that held for months and months. The sky's the limit for the oil price. However, there's no need for concern because high oil prices don't cause recessons, right Ben? 

Whereas copper and crude oil are minor league commodities of no immediate concern, there is trouble brewing in the cost of  another commodity which will hit many Americans right where they live. Fortune Magazine explains the situation in Why Your Toilet Paper Is Shrinking—

When times are tough, companies don't want to raise prices. Instead the things we take for granted get a little smaller.

Everything shrinks in a recession... [Companies] often use a different tactic to offset things such as new competition or the rising cost of raw materials: cutting quantity while maintaining price. Yet it may not be obvious that your ice cream or OJ containers have shrunk.

Manufacturers must note new specs on packaging, but the changes don't have to be advertised (ever seen a now smaller! label?). Here's a look at one of the most recent examples.

You can easily see that wood pulp prices are even higher now than they were in 2008. Consequently, and unbeknownst to you unless you're paying very close attention—I'm sure you are—Scott 1000 individual toilet paper sheets have been reduced in size incrementally from 4.5 x 4.5 inches to 4.1 x 3.7 inches between 1995 and 2010. Welcome to the 21st century, a time when you pay more for the same or pay the same for less.

Isn't a wonderful time to be alive?

Comments

[Matt K]

I'm glad to see you're mentioning the "downsizing" of products. It's most apparent if you look at older recipes that refer to package sizes and compare them to what's available in the store - in almost all cases it's an ounce or two less now than it was. Even the half gallon of milk is 62 oz now.