[Marxism] Global oversupply extends beyond commodities, elevating deflation risk

Louis Proyect lnp3 at panix.com
Sat Apr 25 06:09:29 MDT 2015

WSJ, Apr. 24 2015
Global oversupply extends beyond commodities, elevating deflation risk

The global economy is awash as never before in commodities like oil, 
cotton and iron ore, but also with capital and labor—a glut that 
presents several challenges as policy makers struggle to stoke demand.

“What we’re looking at is a low-growth, low-inflation, low-rate 
environment,” said Megan Greene, chief economist of John Hancock Asset 
Management, who added that the global economy could spend the next 
decade “working this off.”

The current state of plenty is confounding on many fronts. The surfeit 
of commodities depresses prices and stokes concerns of deflation. Global 
wealth—estimated by Credit Suisse at around $263 trillion, more than 
double the $117 trillion in 2000—represents a vast supply of savings and 
capital, helping to hold down interest rates, undermining the power of 
monetary policy. And the surplus of workers depresses wages.

Meanwhile, public indebtedness in the U.S., Japan and Europe limits 
governments’ capacity to fuel growth through public expenditure. That 
leaves central banks to supply economies with as much liquidity as 
possible, even though recent rounds of easing haven’t returned these 
economies anywhere close to their previous growth paths.

“The classic notion is that you cannot have a condition of oversupply,” 
said Daniel Alpert, an investment banker and author of a book, “The Age 
of Oversupply,” on what all this abundance means. “The science of 
economics is all based on shortages.”

The fall of the Soviet Union and the rise of China added over one 
billion workers to the world’s labor force, meaning workers everywhere 
face global competition for jobs and wages. Many newly emerging 
countries run budget surpluses, and their citizens save more than in 
developed countries—contributing to what Mr. Alpert sees as an excess of 

Examples of oversupply abound.

At Cushing, Okla., one of the biggest oil-storage hubs in the U.S., 
crude oil is filling tanks to the brim. Last week, crude-oil inventories 
in the U.S. rose to 489 million barrels, an all-time high in records 
going back to 1982.

Around the world, about 110 million bales of cotton are estimated to be 
sitting idle at textile mills or state warehouses at the end of this 
season, a record high since 1973 when the U.S. began to publish data on 
cotton stockpiles.

Huge surpluses are also seen in many finished-goods markets as the glut 
moves down the supply chain. In February, total inventories of 
manufactured durable goods in the U.S. rose to $413 billion, the highest 
level since 1992 when the Census Bureau began to publish the data. In 
China, car dealers are sitting on their highest inventories of unsold 
cars in almost 2½ years.

Central to the problem is a cooling Chinese economy combined with tepid 
demand among many developed countries. As China moves away from its 
reliance on commodity-intensive industries such as steelmaking and 
textiles, its demand for many materials has slowed down and, in some 
cases, even contracted.

“This fall in commodity demand is counterintuitive, and we have only 
seen the tip of the iceberg,” said Cynthia Lim, an economist at Wood 

Not all commodities are in excess. China’s strong appetite for materials 
such as copper, gasoline and coffee will keep supplies tight in these 

For nearly a decade, producers struggled to keep up with the robust 
demand from China. But with Chinese output now slowing—its gross 
domestic product is expected to rise 7% this year, down from 10.4% five 
years ago—no economy has emerged to take up the slack.

The slowdown has caught many producers off guard as inventories continue 
to build.

The backlog is causing a scramble in many markets to find storage for 
excess supplies, clobbering commodity prices across the board, and 
foreshadowing painful output cuts down the road for many producers. Over 
the past 12 months, a broad measure of global commodity prices, the S&P 
GSCI, has plunged 34%, leaving prices at 2009 levels.

“These inventories have to be drawn down at least to some extent. At 
that point, prices will be back up again,” said Jeff Christian, managing 
director at CPM Group, a commodities consultancy.

Countries facing a demand shortfall often move to juice their economies 
through deficit spending, especially with interest rates so low. But 
many nations are queasy about adding to their debt burdens.

The world’s major economies have all continued to add debt in the years 
since the credit crisis, according to calculations from John Hancock’s 
Ms. Greene. Government, business and consumer debt has climbed to $25 
trillion in the U.S. from $17 trillion since 2008, a jump to 181% of GDP 
from 167%. In Europe, debt has hit climbed to 204% of GDP from 180%, 
while in China debts have jumped to 241% of GDP from 134% by Ms. 
Greene’s measures.

Even if governments have the capacity for more fiscal stimulus, few have 
the political will to unleash it. That has left central banks to step 
into the void. The Federal Reserve and Bank of England have both 
expanded their balance sheets to nearly 25% of annual gross domestic 
product from around 6% in 2008. The European Central Bank’s has climbed 
to 23% from 14% and the Bank of Japan to nearly 66% from 22%.

In more normal times, this would have been sufficient to get economies 
rolling again, but Harvard University’s Lawrence Summers is among 
economists who say interest rates need to fall still lower to reconcile 
abundant savings with the more limited opportunities for investment, a 
scenario termed “secular stagnation,” which implies diminished potential 
for growth.

Not all agree. Former Fed Chairman Ben Bernanke wrote recently that the 
U.S. appears to be heading toward a state of full employment in which 
labor markets tighten and inflation will surely follow.

Just as a U.S. economy nearing full employment may help, new demand from 
emerging markets could help offset China’s waning influence. Enter 
India. Demand for energy and other commodities from the world’s 
second-most populous country has been growing rapidly.

But analysts are skeptical if the increased demand is enough to fill the 
void left by China.

The latest glut also underscores a challenging global trade environment 
as the dollar appreciates against almost all other currencies.

Exporters in countries such as Brazil and Russia are churning out sugar, 
coffee and crude oil at a faster pace, as they can fetch more in 
local-currency terms when it is converted from the dollar.

Producers have their own share of the blame. In a lower commodity price 
environment, producers typically are reluctant to cut production in an 
effort to maintain their market shares.

In some cases, producers even increase their output to make up for the 
revenue losses due to lower prices, exacerbating the problem of oversupply.

“Generally, this creates a feedback cycle where prices fall further 
because of the supply glut,” said Dane Davis, a commodity analyst with 

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