There're lot of similarity between the commodity price surge in early 2008 and the one ongoing. I call them World Commodity Inflationary Wars. Here's the jist of it.
- As with the man with only a hammer, the Fed sees every problem as a monetary one.
- Crisis looms. Fed prints money or otherwise flood the system with liquidity.
- If the crisis is liquidity/capital constrained, this would work: extra liquidity turns into capital of various forms and durations through banks, goes to meet demand and creates economic growth. Like a shitstorm hitting a field with seeds planted in dry and barren soil, this is good shit.
- Good shit not being the case, all the instantaneous "capital" can only go to short-term, speculative markets, usually equities and/or commodities. Like a shitstorm hitting a reservoir dammed 10 feet above ground, this is bad shit.
- Food prices go up, people starve, beginning with the outmost layers of the onion -- the poorest. The Fed has to know that extra liquidity in USD leads to worldwide commodity inflation. But they didn't care back in 08. They don't care now.
An important exception to this bubble is precious metals, whose appreciation is deeply rooted in the declining confidence in fiat currency system and, first and foremost, the dollar. It probably won't end until Hoenig becomes Fed chairman.
If the commodities bubble persists for much longer, US will feel the pain of higher input price along with the rest of the world. The pundits will start talking about deflation and Fed will pull out QE3, which will probably be the last time the world is willing to put up with this mockery of reserve currency.
But there's another way, in parallel, the dollar reserve currency may unwind. This commodities inflation is inflationary only when measured in dollar or some other fiat currency terms. If we barter or trade, say, in gold or through bilateral currency swaps, voila, no more inflation, starvation, or revolution! Desperate people do desperate things. And there're lots of desperate people out there now, both common folks and those in power. I fully expect them to figure out soon that all this suffering and chaos is only because of the irresponsible, abusive custodian of the dollar reserve system.
There's a recent survey showing a lot of Americans don't like the Fed. The Fed should savor this comforting moment because, once Americans realize what it means for dollar to lose its reserve status, the sentiment won't be expressed in surveys.