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The Myths of the Commodities Supercycle and the Chinese Consumer Giant

As already discussed, the prices of many, but not all, commodities have been rising sharply over the past few years. Many factors have come together to cause these price increases. What has been happening, and what is likely to occur next, is easily explained in a coherent fashion using classical economic theories. One does not need to claim that all of the economic premises that have held through the history of mankind have fallen by the roadside in pieces, unshackling humanity from the rules and bindings of economic supply and demand. Even so, many people in the commodities markets today are praying at the altar of a new theory, a theory that commodities are about to enter a so-called supercycle that will last for many years. The high priests of this new religion say that this is a repeat of history. Yet the history books are strangely devoid of any references to long-lasting upward moves in commodities.

What has actually been happening over the past few years is that fabrication demand for many commodities has been rising, reflecting strong economic growth in many quarters of the world and an overall expansion in demand for basic commodities due to the emergence of new consumer economies in India, China, Russia, and other countries. Economic development conditions have increased the demand for many commodities at any given price. Investment demand also is rising. Supply increases meanwhile have been slower ...

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