Copper Crisis

First off – we are not running out of copper any time soon – what are we running out of? Economic headway.

We all know the old saying: “Copper is the only commodity with a Ph.D. in economics”, or words to the effect.

The ongoing price collapse of copper signals that the markets have collectively decided that there is going to be no resurgence of the global economies—at least not for the next 9 to 18 months. Up until now, the economic data that has been coming out over the last couple of weeks seemed to indicate that there’s going to be a double-dip—but in my mind, this fall in the price of copper confirms this notion that the general economy is going down.

And remember: Market sentiment can not only be a predictor of future economic performance, but its determinant. If today the markets feel that the economy is going to suck tomorrow, often that very sentiment is what makes the economy suck canal water.

So if copper is falling like a mo-fo—which both signals and convinces the market that the economy is gonna suck—what does this mean for monetary policy?

Prima facie, the fall in the price of copper is deflationary: Less demand means that the prices fall—meaning the dollar acquires purchasing power.

What does it mean for monetary policy that copper has fallen so low?

It means that Bernanke will carry out more “non-traditional” Federal Reserve stimulus.

Ben Bernanke is famous for being terrified of deflation—and to his particular mindset, this is a reasonable fear. More to the point, Bernanke’s deflation-phobia actually matters—because after all, he is the Chairman of the Federal Reserve. He controls U.S. monetary policy.

Deflation is supposed to be bad because it shrinks an economy. (Personally, I am more afraid of inflation than deflation: The latter is self-correcting, while the former spirals out of control and into social chaos. But that’s for some other post.)

There are so many things wrong with inflating the money supply under current condition. What if the banks hold on to the money as they have been doing because their assets on the books don’t match their liabilities? What happens should the banks release that money in a flood? Prices of life essentials could shoot through the roof. Or suppose the banksters just release the money to the cronies? Buying government will be an ever larger part of businesses that can afford it.

Nothing good will come of this. As I see it nothing good is coming our way for another 18 months. Me? I won’t breathe easy until Palin is elected. YMMV.