powayseller, yes, I met you on Saturday and you said I should post…
So, you have about 5 other questions… I will try to address a couple, but this will be a long post.
At commodities and oil: I think these have in general had a fantastic run in a short time but I personally would not label them a bubble yet. A bubble/mania could materialize, but I prefer to find value elsewhere now. Lots of money could be made speculating, but my opinion is that you should have gotten in 5 years ago, not now. If you got in now, a downside break could wipe you out. Sure, they (gold and oil) could double again, but the easy money has already been made. It’s like buying a house in 2002 or 2003. Most of the easy money (less risk) had been made up to that point, and more money was made between 2003-now, but you hopefully agree that the risk in the latter timeframe is much greater.
RE: China and US: Similarity between Europe and US in the post-WW1 era is discussed in “Economics and the Public Welfare” by Benjamin Anderson. Read the first 8 chapters or so (much much longer than this post). The book is out of print, but you can find a copy on the internet or at a library.
In a nutshell, because the US got involved in WW1 at the very end, our manufacturing had been growing to meet the needs of the Allies in Europe. Also, we didn’t suffer losses of homes and factories in the war. After the war, the US govt loaned money to the Allies so they had time to build back their manufacturing sector. The thing is, when you loan money to people, they just buy stuff. Since US manufacturers relied on this demand, they were happy to make stuff to sell to Europe. Commodity prices soared because of the demand. Prices of stuff also went up since there was US demand for the same products that were sold to Europeans. When the US govt realized that Europe wasn’t doing anything but consuming, then they realized that they had no means to pay back the debt. Don’t think about currencies. Currencies will confuse you. If one sits around borrowing and spending and the other works and lends, then there is an imbalance. Ask yourself what a person sitting around is doing in return for your hard work. So, the US govt stopped the loans. But it didn’t end there! The US manufacturers saw that the demand for their products would disappear, so they loaned money to buyers in Europe! The US businesses then went to their own banks and borrowed money to keep their businesses going. So, finally, the US businesses also realized that the borrowers were not going to pay them back. At that point, it was over. Commodity prices dropped in half in about a year. Recession was short but many businesses were hit hard. Because the government didn’t intervene but instead just allowed the prices to drop, the economy self corrected. This means wages dropped and prices dropped. This is how an economy corrects. Money printing props up wages and prices and makes things worse.
The recovery was rapid and of course the boom/bust everyone remembers is the 1929 stock market crash because the 1920-21 paled in comparison.
So, what about today? My opinion: China is essentially lending money to US consumers via treasury purchases. When the US consumer finally stops borrowing it will be over. Houses will no longer be built and tapped for equity. China will have lost its largest customer. They will not be able to pick up the slack. Commodity prices will fall. However, our Fed will likely lower interest rates to desperately try to stimulate the economy. This will only make things worse. If borrowing got you into crisis, how does more borrowing help? It’s like trying to drink yourself sober. It doesn’t work.
