Tuesday, September 7, 2010

The March Towards a Global Commodity War and the Pressure It Will Put on Interest Rates

Russia has banned the export of wheat, as China has reduced its exports of "rare metals" such as cerium (used in glass), lanthanum (oil refining) and  yttrium (displays). This is clearly global commodity hoarding. While low Treasury rates indicate the desire by many to raise cash levels. There is a countervailing trend to hold commodities.

This means only one thing, upward pressure on these commodity prices.

At some point, as the short supplies are reflected in higher prices at the retail level, price inflation will start to become noticeable by consumers and investors. This will cause a reversal of the current downward trend in interest rates.

If the Fed doesn't react quickly enough to adjust rates upward (and I doubt they will), a huge new burst of money supply (M2) could result, pouring more inflationary fuel on the fire.

Bottom line: This is just another way the Fed can be boxed in, with serious inflationary ramifications for the economy. It is extremely dangerous to hold long term Treasury securities or any other type of long term debt at this time. There are multiple pressure points in the economy, including the growing debt and the inflationary ramifications of the global hoarding of commodities, that eventually a huge spike in interest rates will occur.

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