Chine - recources vs profit

[AWPrime]

Lately the prizes of resources is beginning to rise. The chinese growth is one of the reasons why this is happening.

Now my question is: Does China on a whole have a good effect on the western economies or a bad one?

 

[aerocontrols]

If China's economy improves, it's better for everyone, on the whole.

I'm sure people with more economic expertise than me will chime in here, both in agreement and disagreement with my position.

 

[Tex]

For a typical citizen of a Western economy, I believe that the effect is negative. Free trade will produce a shift toward equilibrium, where China will be elevated from its current position and more wealthy nations will decline. Someone is probably going to come in and say that "economics is not a zero-sum game" or something similar. But as you suggest, we are indeed living in a world of scarce resources. The only possible benefit I can think of is that Western economies will be pushed toward more efficient use of resources to sustain their current quality of life and this change may drive new technologies and jobs. But that may not happen, since the means of production to create these new technologies is already being moved overseas.

 

[CBL4]

The reality is that virtually ever natural resources are getting cheaper and cheaper compared to other goods. They had large upswings and downswings but the trend is towards resources becoming free. Americans are seeing a much larger upswing than the rest of the world due to the fall in the dollar.

The Economist has a commodity index which has tracked natural resources vs. inflation since 1845:

In 1999,

The industrial commodities index has fallen this year to a record low in real terms—80% below its level in 1845. ... Since its recent high in 1995, The Economist’s industrials index has fallen by more than 40% in dollar terms.

http://www.economist.com/displaystory.cfm?story_id=321036

In 2005,

Since October 2001, our dollar-based industrials index has risen by 76%, fuelled by Chinese demand for raw materials and, in part, the weakness of the dollar. Yet in real terms, industrial commodity prices are a mere 30% of their value in 1845

http://www.economist.com/displaystory.cfm?story_id=3651836

BTW, starting at 1845 is a misleading year because it was in one of the downswing in prices. If we choose 1860 the figures are 16% and 24%.

CBL

 

[Tex]

So, when adjusted for inflation, many natural resources have been getting cheaper over the past 150 years or so. But China's explosive growth didn't really take off until recently, so I'm not sure what that data really tells us about the issue at hand. I'd still be concerned with the 76% rise over the past few years. Sure, it may be due to weakness in the dollar but that's little consolation to those who earn and save in dollars. And why is the dollar collapsing? Because we are trying to maintain the same level of resource consumption but we can't afford it without piling on more and more debt.

 

[CBL4]

So, when adjusted for inflation, many natural resources have been getting cheaper over the past 150 years or so. But China's explosive growth didn't really take off until recently, so I'm not sure what that data really tells us about the issue at hand.

Unfortunately, the story is subscriber only or I would suggest you look at the chart. A 76% increase seems huge until you look at the historical data - then it looks large but to be expected. It is difficult to tell from the chart but in the last 50 years this look like this is the 4th time it has been over 50% in a short time (1973, 1980 and 1992). It appears that at least once in each the last 16 decades, commodity prices have risen by at least 20%. This current increase does not look unusual.

Yes, the Bush administration is running huge deficits and causing a weakening dollar. Reagan did the same and we had an increase of approximately 65%. The deficit decreased and commodity prices fell. It will happen again. The cycles are predictable and always have large short term effects but the long term trend is clear - natural resources are approaching zero value.

Human ingenuity increases steadily which means we can do more with the same amount of raw materials or by using an alternative resource.

CBL

 

[AWPrime]

natural resources are approaching zero value.

Quite impossible, but can be explained by that resources become cheaper when there is more energy available to process them.

 

[CBL4]

Quite impossible

It is not only possible it is demonstrably true. Commodity prices are 1/4 what they were in 1860. 1/3 of what they were in 1950. 1/2 of what they were in 1975. In other words, if commodity prices double they be the same (inflation adjusted) as they were in 1975.

If are saying that they will never hit zero, that is correct but not terribly important. Each decade, they get cheaper than other goods, services and salaries. They play less and less of a role in the economy. For example, commodity prices have risen 76% in the last few years and inflation is under 3%. Commodity price barely matter now and will matter less in a 10 years.

CBL

 

[CBL4]

I have a clarification. The Economist tracks food commodities, metals and non-food agricultural (NFA) commodites. Industrial commodities are a combination of metals and NFA. I have improperly mixed my numbers.

The 76% gain is in industrial commodities only not total. The total commodity price gain from Oct 2001 to Jan 2005 is only 30% in dollar terms. However, in Euro terms, the total commodity prices remained unchanged.

CBL