by Alex Tabarrok
on February 20, 2010 at 2:27 pm
in Data Source, Economics
Following up on my post, Revisiting Simon-Ehrlich, Mark Perry graphs the Dow-Jones AIG monthly index of 19 commodities, inflation adjusted, 1934-2010.
I too am interested in seeing how oil fares compared to trend.
Oil is in the index
I’m interested in if this is total return as well.
There is no such thing as a “total return” for commodities. Commodities don’t pay dividends. The components of the index are actual physical commodities and/or futures, not the companies that mine them (which would be another interesting chart.)
Of course there is no guarantee that this trend line will continue. Indeed, the theoretical model of Hotelling says that the real price of nonrenewable depletable resources should rise at the rate of interest. That can be offset as it has been so far by tech improvements in use and discovery and extraction. But, there is no guarantee that these will continue, particularly with regard to all-too-important oil.
If one looks at this trend a bit more closely, one finds that if one cuts it off at the early 1980s, there is no trend. What gives us the trend is the decline from the early 1980s to 1998. However, the trend has disappeared since then, with 1998 being the all time lowest point. Even our nasty recession did not put the prices below the 1998 level, and they seem to be going up again.
Since there are a number of factors behind changing prices of goods, I’m curious to know how much of the (inflation adjusted) decline in prices for commodities is a reflection of lower resource intensity in production.
I.e., are commodities really getting cheaper, or does it just seem like it because there is so much more total production?
I’m optimistic, but I hesitate to look at trends for the two generations that produced/extracted more commodities than over the rest of human’s existence (well, for some of them), and then conclude that these price signals are, by virtue of the magic of markets, reliable indicators that there will be more than enough to go around in the future.
I do have to admit though, that I have yet to hear a thoroughly convincing argument from a resource alarmist about how declining real commodity prices fit into their picture. Concerns about externalities and future generations’ access to resources both not appearing in today’s prices are real, but this graph does still appear comforting.
Actually there are total return indices for commodities. The reason is that when you invest in futures you can put up a small percentage of your portfolio and invest the rest in cash. The cash percentage would likely offset some of the depreciation of commodities due to inflation.
I am going to put this more bluntly. If having the worst recession since the Great Depression did not
push this index below its all time low in 1998, what will do so? Give this, is there any reason to believe
that we are in a long-term downward trend?
So everything will be free in 2030.
The index includes heavily subsidized ag products – no farmer makes money from growing corn, soy, most wheat, but instead makes everything from the government payments to farmers. Since Earl Butz, the emphasis has been on volume production, with no quality, of goods useful only as inputs to factories. And other subsidies include nearly free water in places like the arid US west, thanks to the taxpayers. For mining, the mining companies are allowed to harm others with pollution, thanks to government protecting corporations from consumers and individuals.
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