The long history of commodity busts

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By Leith van Onselen

From VOX comes a new report looking at 100 years of commodity booms and busts, which argues that “lower commodity prices are here to stay for a while” and that “we may have to wait many years for the next boom to come along”:

Commodity prices are very persistent. During booms we seem to forget that they have always (yes, always) been followed by busts (see Figure 1)…

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A ‘real’ view of the recent boom would be that strong global growth (until the Global Crisis) and especially high demand from China pushed stocks low and prices high. China grew at an average rate of 10.5% for 10 years (2002-12), creating a new economy the size of today’s Sweden or Argentina every year. But supply eventually caught up…

Indeed, the very high uncertainty in any commodity price projection, including those extracted from futures prices, underlines the need for commodity exporting countries (and some importers) to find ways to manage these risks…

Perhaps most worrisome for commodity exporters is the prospect that prices may fall below the previously established equilibrium in real prices…

The two largest previous commodity booms in the past 115 years (in 1920 and in the early 1970s) both ended with crashes that lowered real prices relative to the previously established equilibrium – see Figure 1 again.6 The recent boom has been exceptional both in terms of its size and duration; only time will reveal the full impacts of supply innovations on long-run commodity prices, but if history is our guide they may lower real commodity prices even further. And we may have to wait many years for the next boom to come along.

It really is a shame that Australia’s policy makers, the Australian Treasury in particular, did not view the commodity boom for what it was: a temporary windfall gain.

Few people, apart from a small band of heretics (including this site) believed that Chinese fixed asset investment was unsustainable or that commodity prices and the terms-of-trade could slump. The boom was seen as permanent, leading to utter disregard to concerns around Dutch Disease and the gutting of Australia’s trade exposed industries (most notably manufacturing), as well as a swath of unsustainable Budget giveaways (I’m looking at you, Peter Costello).

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Unfortunately, the mainstream was wrong, which is the primary reason why Australia is facing endless massive Budget deficits, along with falling income and rising unemployment.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.