The Commodity Market and the Cold Economic Implications
There are many important socio economic and financial events and developments that happened in the history of the United States and the world. Sadly, some of the important events are remembered in negative light because it featured hard times and not positive times. Perhaps, one of the most important and the dimmest moment in the global socio economic and financial history is the occurrence of the Great Depression.
The Great Depression was a catastrophic meltdown and breakdown of the system that was supposed to protect the world and ensure that the financial and economic motion of the world moves on sans any serious disturbance. They were disturbed, nonetheless. The disturbance came in the form of the Great Depression, and other minor financial and economic setbacks after that, leading all the way to the present day recession, which is yet again another serious problem that is being confronted by government agencies, as well as private entities in the hope that this problem does not go any further.
The Great Depression and the current recession share many things in common, particularly the parallels found in how the volatility and stability of the commodity market was characterized during these two particular periods in the global financial and socio economic history. The relevance and importance of this discussion is hinged on the fact that financial depression, and even recessions, are important and affects everyone.
Discussing it and providing additional literature for this particular aspect of economic discussion is important because of its ability to act as catalyst for information source for individuals who are exposed to the text discussing the aspects of commodity markets and how it is affected by the Great Depression and the current recession; possibly, it is also important to discuss the other possible financial and economic recessions and depressions happening in the future.
In the course of the paper, what would be discussed and explored is the drawing of the parallels between the volatility and stabilization of commodity markets during the Great Depression to those of the current recession. A. Commodity Market and Local/Global Economics The commodity market has always been affected by the local and global economics, which in turn has always been affected by what happens in the socio economic and financial landscape of the country and of the world.
Although there are many different aspects comprising the economic sphere, these are all interlinked with one another. The changes that happen in one sphere will sooner or later affect the other aspects of the national/global economics, setting off a chain reaction. It was the concept of chain reaction that featured the domino effect in the economics that affected commodity market during the Great Depression and during the global financial crisis; there were, of course, key reasons why such things happened.
One of the characteristics that are similar with the Great Depression and the current recession is the recurring theme of unequal distribution of wealth. There are economists and theorists like Waddill Catchings and William Trufant Foster who argued that the onset of the economic depression like the Great Depression was caused largely by the unequal distribution of wealth among the people (Jacobs, 2005, p. 83).
In the case of the Great Depression, there are few people who have money to spend and there are many people who have very little to spend so they don’t spend much. The presence of the concern on the uneven distribution of wealth affects the commodity market because the traffic of the goods being sold or produced relies heavily on how the people inside the community/society/country is endowed with their own share of the overall financial power and monetary distribution inside a group of individuals. For the production arm to function, it needs financial resources.
For the production of commodity market goods to be necessary, the previously produced and traded commodity market goods should first be consumed to avoid unmoving supply and the problem of overproduction that freezes the money (capital) inside the unconsumed goods. Distribution of wealth has been voiced out as one of the problems during the Great Depression; people believe it triggered the great depression. During the recent recession, there are still fingers that point to the unresolved issue of uneven distribution of wealth. This is not surprising in the era of capitalism and consumerism.
It becomes a problem, however, once the presence of uneven distribution of wealth makes the commodity market and the goods inside it incapable of being productive for the society. But with the production model in the country geared towards production, the country and the world soon became bloated with unconsumed goods. These unconsumed goods, which the people did not buy and consume, resulted to losses, especially to small time business entities who expect very little or minimal earnings if the sales of their goods reach their minimum expectation.
But if it did not (which happened because the people in general do not have enough money to spend), the world might be placed in a situation wherein there were too much goods – including commodity goods in the commodity market – and very few people buying or consuming it. This, according to Foster and Catchings – was one of the possible reasons for the occurrence of the Great Depression, and this can also apply to the recent recession (Jacobs, 2005, p. 83). The world is still heavily producing, including raw materials and raw goods that are clustered in the commodity markets.
But because the consumers are consuming very little of these products, income was affected. The goods that were not sold affected the people with lesser money more, especially since this situation ties up their hands and making them incapable of moving on if they cannot even get back even the capital for their business ventures back. If the case of undistributed wealth persisted and production at the current rate is still pursued, there is the danger of recessions and even more depressions in the future because the money that can purchase and consume these goods are distributed to a select few individuals.
This affects the commodity market because this can result to the closure of smaller businesses, which in turn, can affect the production output and eventually the ability of the country to earn. They will be getting fewer and fewer commodity goods to sell if the producers stop producing because the product they produce is not being consumed in a rate that guarantees a decent margin of income enough to keep the business going. For example, the producers of a certain commodity (i. e. grain) cannot hope to extend and continue their business if their latest batch of products are not being sold to the public.
Where will they get the money to continue the operation if not for the profit that they are expecting but not getting? The commodity market may not be the direct culprit for the Great Depression. The role of the commodity market, how it is important to some countries and how commodity market goods were eventually hit by the depression materialized once the United States and other countries made the frantic moves geared in the hope of salvaging the financial landscape of the country via last resort actions which did not help anyone.
It did not help the country of origin. And worse, it made the situation in other countries more unbearable especially those which relied heavily on commodity market goods exporting (Eichengreen, 1996, p. 230). “Stocks were dumped on the market, provoking a liquidity panic that aggravated the crisis of the commodity-exporting regions (Eichengreen, 1996, p. 230). ” B. Great Depression and the Commodity Market No other global financial and economic nightmare would have been equal to the Great Depression during the 1920s and the 1930s.
The Great Depression was an encompassing socio economic event that broke the financial and economic backs of several different countries, from the rich, first class countries all the way down to developing and third world countries and even in poorer countries (Eichengreen, 1996, p. 58). “Like their North American neighbors, these countries were subjected simultaneously to capital and commodity market shocks (Eichengreen, 1996, p. 58). ” The Great Depression saw the loss of money and value among the different social institutions, and how the resulting panic made it even worse.
“The Depression produced large budget deficits, unprecedented levels of unemployment, bank failures, and crashes of stock and commodity markets (Makin, Ornstein, 1994, p. 91). ” It reflected some of the flaws of the financial and economic system in the local and international sphere. Because of the inability of the leaders to exercise vision and to correct the system before it showed the negative effects, the world suffered in different degrees and stages throughout the world during the Great Depression.
During the Great Depression, the impact was felt in the commodity market sector because of what professionals believed to be an “exceptional speed of the decline in commodity prices in the final quarter of 1929 (Eichengreen, 1996, p. 230). ” This particular incident and movement in the commodity market was surely an indicator that something that is powerful and destructive and life-altering. It was happening because this particular movement in the commodity market is not normal.
If there were fluctuation in commodity prices, it comes far and in between and usually not in such short period and not as drastic compared to what happened during the Depression. During the Great Depression, those who did not have enough money were not able to continue with their business that is related to commodity market. For example, farmers and those in the agricultural sector, from which the country relies for the supply of necessities that are important in the sustainability of farming and production, suffered from the loss, slow down or decrease in government support.
Their own personal money was not enough to make the business stabilize throughout the Great Depression because local resources are getting more expensive. The value of money was shrinking that the ordinary individual cannot afford to buy anything with the money he or she got because it has lost its value. When this happens, the areas of production losses its means to efficiently operate, letting go its workers, shutting down the plant and contributing to the decreasing source of supply which the country can trade.
Even if they can, it is difficult because other countries are very cautious of what they buy from other countries (they only opt for what the country truly needs). The surplus of what was not sent outside of the country was already lost capital for the business entities. The goods inside the commodity market that are used for processing other things that are not included in the most basic needs of humans were the ones that experienced a slowdown in trade. This is because of the Depression, especially when the attitude of the people was simply to secure what they basically need.
With no money to buy for other things that were not as important as basic needs, the demand dropped, the products went untouched in market stands. The trade for the supply for the raw materials of these items choked inside the supply line because as the Depression pressed on, some items on the commodity market found itself stuck and with no place to go. This situation created a vicious cycle that involved and affected many different financial and economic sectors including the commodity market.
With decreasing number of prospective buyers for the commodity goods traded inside the commodity market, there was no other choice but to cut down prices. The cutting down of prices of the commodity goods for sale went down to as high as 60 per cent cut. Because of that, farmers went broke and bankrupt, unable even to settle for a break even for the production (Eichengreen, 1996, p. 230). The commodity market was being targeted to be re-energized. Subsidies from the government started pouring in, funnelled towards agricultural business.
The agricultural businesses can resume its operation and the supply of the products that this sector produces can start pouring in again, in the belief that the presence of commodity goods that can be actively traded locally and internationally can help contribute in the revival of the country’s financial situation. C. The Recent Recession The recent recession was a product of the problem in the financial landscape that began in the housing sector.
The appealing mortgages offered by banks and financial institutions to loaners attracted many people who opted to loan, but the interests ballooned over time and the individuals found out soon that they cannot handle the payments anymore. During the Depression, specialists believe that what happened was a case of mismanaged wealth and money. During the recent global financial crunch that affected the United States as well as the rest of the world, it appears that the same problem was at hand (Mc Kay, 2009, p. 398).
The result was that there were so many prime houses and lot properties that no one wanted to buy. This was followed by other financial problems, especially since other industries are connected with the banking and financial institutions. The bad debts originated from the housing and mortgage sector spreading all around the country and all around the world, eventually. The drop was serious, and for some analysts there were parts of the housing crisis/current recession that are “worse even during the Great Depression (Mc Kay, 2009, p. 398).
” Months later, what was once originally a problem between banks, the mortgage and the house owners, who cannot cope with the payment, infected other aspects of the financial and economic landscape. Soon the impact of this financial problem was also felt in the commodity market sector (Mc Kay, 2009, p. 398). The government tried to answer the problem of the global financial crisis in different ways. The efforts were mostly centered on the cooperation of government entities, as well as private groups, including banks and those willing to invest money to help struggling companies recover, or even opt for buy out.
In the US, the Emergency Economic Stabilization Act of 2008 was created as an answer to the problem in the hope that this would be the remedy that the country and the private institutions needed. This was focused on addressing the financial problems of big business entities, primarily banks and loan and mortgage entities (Abrahams and Zhang, 2009, p. 1). Volatility of Commodity Market The commodity market is volatile because it is affected constantly by what happens inside the trade and economic/financial circles. Demand for the items inside the commodity market shoot up and drop very quickly and very unexpectedly.
This is because of how it reacts to the national and international economics around the world among different countries; especially since commodity market’s important aspect is international trade. The commodity market is volatile because prices go up or spiral down. The value of the commodity market goods can easily be lost if there are sudden and unexpected changes that affects the need, production and trade for these goods and items. The characteristics of the commodity market can change overnight, especially if the factor that caused the changes has sufficient power and impact to alter the features of the commodity market.
This characteristic of being volatile was reflected when the commodity market displayed changes in feature, especially during the two important financial and economic events in history: the Great Depression and the recent recession. The volatility in commodity markets signalling the recession was described by writer Andrew Leonard (2008), who started his article about how the present recession shaped up by discussing the early tell-tale signs found in the socio-economic landscape (Leonard, 2008).
According to Leonard, the change in the commodity market, particularly the prices were among the signs pointing to the recent recession, citing the increase in the prices of milk, eggs and bread – some of the most common commodities – as indicative of the recession and its volatility which is characterized by price increase happening in short period of time, the increase happening in the weekly basis (Leonard, 2008).
The Great Depression and the current recession shared parallelisms when it comes to the volatility of the commodity market. In particular, it is how the production of goods comprising the commodity market has either slowed down because of the problems involving money and resources. There are reasons why all of a sudden, the country is not performing in its production and importation of goods.
These are goods which the country was able to sell before outside of the country, affecting the gross national product, as well as the other indicators that tell the people how the country is doing in terms of production of raw, as well as processed products and the rate of the country’s ability to export the products and send it to other countries in return of financial earnings and economic gain.
Ledbetter (2008) explained that during the Great Depression, particularly in the cluster years of 1929 all the way to 1933, there was a decline in the GNP of the United States (Ledbetter, 2008). This was a characteristic that, no doubt, involves poor and volatile commodity market movement that affected the United States, which was unable to produce as much as they wanted and was unable to trade as much as they wanted. Countries all around the world, at the onset of the Depression, were not having enough money to participate in international trade.
In the current recession, the commodity market is yet again affected, in one way or another, with regards to the consideration for the content of the economic and financial indicators. As Leonard (2008) explained it in the article, the level of manufacturing capability of the country was decreasing and marked serious landmarks unreached in the last five years, although he hinted with veiled and feigned optimism that technically there is still nothing to worry. The successive negative marks in the GDP of the country is still not considered as depression (Leonard, 2008).
Another significant parallelism between the great depression and the current recession, when it comes to the involvement of commodity market, is the that, in both cases, there was an important source or trigger that started the snowball effect leading to the Great Depression and the recession. For the Great Depression, an important aspect involving the commodity market is the role of the drought and how this drought affected the farmlands and agricultural lands in the US, which in turn, affected the ability of the US to produce items that were sold in the commodity market.
This affected the profit and income earning ability of the country and contributing to the overall economic and financial problem of the country. For the current recession, there were no droughts, no problematic agricultural aspects to consider and no production of commodity goods to think about since the problem originated from other sectors (housing, banking, lending etc). But commodity goods and the commodity market was immediately affected when the recession was finally felt, just like what happened in the Great Depression and what happened in the current recession.
The characteristic of volatility was reflected in the drastic changes, like the shift in the prices of commodity goods (Department of Economic and Social Affairs, 2009, p. 46). “The financial crisis contributed to the slide in commodity prices from mid-2008 as financial investors withdrew from commodity markets (Department of Economic and Social Affairs, 2009, p. 46). ” How they are parallel is that the commodity market was affected by the problematic financial situation.
During the pre-Great Depression era and pre-2008 recession era there are banking and financial styles and methods that are potential contributors to the crash, which was eventually realized. And with the crash, commodity market – in both cases – was easily and immediately dragged along the mess. During the Great Depression, some countries looked at their commodity market and soon found that they cannot use it in the meantime for their economic salvage effort. On the contrary, there were other countries that relied on their respective commodity market.
The business entities and the governments hope that the commodity market trade can accomplish its target that can eventually help the country’s economy stave off the ill-effects of the Great Depression and protect its own financial and economic sphere from the ripples of the looming financial havoc (Eichengreen, 1996, p. 230). “As the demand for commodity imports in Europe and the United States began to fall, the heavily indebted nations boosted their commodity exports in a desperate effort to generate foreign exchange needed to service their debts (Eichengreen, 1996, p.
230). ” Because of the Great Depression and the global financial crisis that hit the world in 2008, a series of ripples were created. One of the ripples involved the commodity market, particularly, the import-export sector. Because the countries are fast losing money and the value of their own money in danger of losing, the countries individually are trying to protect whatever value was left by opting to regulate the entry of imported products and trying their best to make their exports shore up the current financial status of the countries.
This behavior among countries impacted the exporters found outside the countries especially those exporting raw materials. If the doors where the export materials are headed are closed or have narrowed, the goods and items will have to be sold or traded elsewhere or else, be rendered useless over time if not traded, processed and consumed in a specific period of time (especially commodity market goods that are perishable or those that will lose its quality over long or over extended storage).
The Great Depression and the recent financial crisis shared the parallelism of triggering the regulation and control of the import and export traffic. And because of that, commodity market and commodity market goods and its trade traffic were affected in both occasions. Commodity Markets and Stabilization One of the expected constants when it comes to recession, financial failures and downturn in financial and economic power, is how things will rebound and get better from there.
Expectedly, things soon got better for the US and for the world after the Great Depression when the country and the world managed to recover. Schultz (1999) wrote about how the cycle will always involve the presence of the possibility to return towards prosperity, according to the American John D. Rockefeller (Schultz, 1999). This was not only a pep talk for blind hope, but is actually a testament to what can really happen. The Great Depression and how the world was able to recover afterwards, was a solid example that there is always light at the end of the tunnel.
But to be bathed in light, the country and the world has to go for the end of the tunnel. They can run, walk or even crawl just to get there; the point is they can, they would and they should (Schultz, 1999). During the post Great Depression era, it is likely that the same attitude will be applied again for the current recession. Everything will experience a rebound like what happened before. This will include changes in the commodity market, the most important of which is the entry of stabilization.
This same scenario is expected of the recent recession because of the natural constants of up and low – after the low point that is recession (and in the case of the past, the Great Depression), improvement in financial and economic landscape is expected. One of the things that will be impacted is commodity markets and how commodity markets will stabilize again. Local and national governments, not just in the United States, but also in other countries, are expected to take part in the effort towards the stabilization of commodity markets because this is the only option left.
It is unimaginable that the United States, or any other first world country, would just leave the country spiralling downwards in poverty while no one takes action. As an economic and financial hegemon, especially in the last several decades, the United States, just like what it did in the past, would recover from the recession. And that recovery will be characterized by many different improvements and developments. One of these improvements and developments will include the stabilization of commodity markets. A.
How are Commodity Markets stabilized during the Great Depression President Roosevelt’s solution to the Great Depression included in its focus, addressing the problems of farmers who are the producers of the items that are traded inside the commodity market, through FDR’s very popular “New Deal” scheme (Edsforth, 2000, p. 1). It was those who are in the agricultural sector that was affected the heaviest and the one that has the least of the abilities to rebound and become productive again after being staggered by the impact of the Great Depression.
The scheme of the president was what the people in the agricultural sector needed – the support and funding, so that they can start back again and be productive and contribute to the commodity market through their role in supplying the network with goods that can be traded. The commodity market was stabilized when the local and global financial and economic network responded positively, over a period of time, to the changes and actions that the United States and the rest of the world initiated and set in motion.
Important in the stabilization of the commodity market was the fact that there were conscious efforts and well defined action plans that answers the concerns and problems that affected and dented the commodity market and its production and performance B. Parallelisms of Commodity Market Stabilization of the Recent Recession with the Great Depression It is not safe to assume that the United States and the rest of the world have finally managed to survive the recession because it is not clear if the country and the world is completely over it.
But in consideration for the efforts that are being made to address this problem, it can be seen that the target of the attention is not really centered on commodity market but on revitalizing the institutions that went bankrupt. Economists are hoping that if these bankrupt entities finally stabilizes themselves and be the blood clot that will stop the financial bleeding, what happens next is that the country can again experience a more stabilized commodity market.
Prices of commodity goods, hopefully, will go down again. In some cases, the market will become competitive again that the trading of commodity goods will not be placed in Polar Regions. They are neither too expensive to be bought, nor lose its market value because the financial crisis makes the society too poor to even afford even the most basic commodity, killing the process of trade and in the long run stopping the process of production all together.
The parallelisms in the stabilization of the commodity market found in comparison with the Great Depression and the recent recession include the following; government effort and intervention; global action and the use of new financial and economic approach and outlook by the government; private sector geared at rehabilitating the wounded economy and revitalizing the local and international trade, especially of commodity goods (in the way revitalizing commodity markets as a whole). The administrations handling the Great Depression and the current recession saw fit to focus on certain aspects of remedial actions involving the commodity market.
The characteristics for both courses of action for the two events share certain similarities and parallelisms. First, there was the presence of government effort and intervention. The government exerted as much effort as it can so that the Great Depression and the recent recession are both effectively remedied. In both occasions, the government made sure that it will not ignore the commodity market in its overall plan and scheme to answer the financial problem. This similarity is due to the fact that both governments are aware of the importance of the commodity market, may it be during the 1920s or in 2008-09.
While the details of the action plan may vary, especially since there are differences between the two problems, still, the commodity market is considered as one of the focal points of the government action when the action plan for rescue and/or rehabilitation of the financial landscape was set in motion (Sarris, Hallam, 2006, p. 284). In the recent recession, there was government intervention, too. This came in the form of financial aids geared at helping the institutions handle their financial problems and keep them from declaring bankruptcy and closing down.
“Continued government support for commodity producers, including coffee farmers, has ranged from debt restructuring or forgiveness to direct and indirect subsidies (Sarris, Hallam, 2006, p. 284). ” Government intervention was expected, especially since the government has the responsibility over the financial aspect of the country. It has sufficient power, authority and resources to help the business entities affected by the recent recession. While the focus of the bankruptcy was not directly inside the commodity market sector, this particular aspect was affected, nonetheless.
Even if they are not the major target for revitalization through financial aids, the overall program design to boost the country’s economy will impact the commodity market sector positively. Another parallelism found in the commodity market-centered efforts during the revitalization of the economy, business and financial sectors of the country during the Great Depression and during the recent recession, is the use of international trade networks so that the recovering commodity market has sufficient elbow room to move.
What was important during the Great Depression and during the recent recession was that the countries were all trying to stave off the impact and recover from the deluge by keeping the trading lanes open and not constricting commodity market and its goods and products (International Monetary Fund, 2008, p. xiv). “Commodity markets have continued to boom despite slowing global activity (International Monetary Fund, 2008, p. xiv). ” While there are still signs of the old protectionists instincts, it is clear that the countries still try to maintain a trade relationship with each other.
They hope that they can weather the storm this way and not necessitating the option for foreign trade closure that can hold hostage the commodity market goods, which will have limited places to go to. If the currency of the country is dropping, there is a big chance that the goods in the long run will have large parts of it remain stagnant and not purchased/consumed/processed. Professionals and analysts discussed how the immediate reaction at the onset of the Great Depression was for countries to minimize international trade participation, and in the process, minimizing their trade of goods from the commodity market sector.
The same was the case during the global financial crisis (Department of Economic and Social Affairs, 2009, p. 46). “The credit crunch is also expected to have a negative impact on international commodity trade by raising import financing costs (Department of Economic and Social Affairs, 2009, p. 46). ” In turn, this resulted to the reduction of “import demand and contribute to further declines in commodity prices (Department of Economic and Social Affairs, 2009, p. 46).
” The move was considered not just as a wrong move but a move which helped to make the situation get worse. What should have been done was the continued activity in international trade and in import-export albeit with minor restrictions so that local business is not also severely impacted by the presence of foreign goods inside the countries that competes with locally made and locally produced products. It is important to note that during the time of the Great Depression and during the time of the recent global financial crisis,