[Marxism] Global oversupply extends beyond commodities, elevating deflation risk
lnp3 at panix.com
Sat Apr 25 06:09:29 MDT 2015
WSJ, Apr. 24 2015
Global oversupply extends beyond commodities, elevating deflation risk
By JOSH ZUMBRUN and CAROLYN CUI
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
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
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.
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
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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