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« Consensus Economic Forecast: Looking Better in 2011 | Main | Can Watson Do Economics? »

February 14, 2011

Comments

Lee

You are correct that growing demand has caused an increase in prices per your graph. However we have to consider the risks of supply disruptions when assessing the effects of price on growth. There are factors that could limit supply. One example is the unrest in the Middle East. Libya recently called a force majeure on exports of 1.5 mb a day of oil (approx 2% of global production). Unrest could cause even bigger oil disruptions if it spread to Iran or Saudi Arabia. The March WTI (oil) contract shot up 8.6% to $93.57 since its close on Friday. Another example is flooding in Australia that has lessened coal supplies. These are just two examples but these types of risks need to be considered since they could impact growth by limiting supply (increasing supply costs).

Also, you are looking at global growth as a whole. The growth of one region or country such as China could push up prices globally. Their growth would push the demand curve out and therefore increase prices. The other countries would then experience higher prices as if the supply curve had shifted up. These shifts would not be a problem for growth in China however they would limit growth/recovery in other countries.

Phil Aust

I agree with Lee. If you look at the world as one economy, higher prices because of higher demand isn't a bad thing.

But if you have higher prices in the U.S. because of higher demand in China or a supply shock, the result is the same. The supply curve available to the U.S. shifts to the left (higher prices for each quantity supplied) Since the US is a net importer of energy, this will result in a higher U.S. trade deficit and reduced real income in the U.S. consumer because of higher energy costs.

Jesse

I'd make the point that we don't have an economic recovery. We do have however symptoms of an economic recovery as a direct result of Government and Fed interventionist policies.


Without...

- changes to mark to market accounting regulation
- Fed Bond Purchase Program
- trillions of newly created dollars injected into markets
- foreclosure moratoriums
- bank bailouts
- homeowner bailouts
- artificial consumer spending

we would not be talking about a recovery. The interventionist policies just continue to do more of the same. Artificially boost GDP numbers giving the world the illusion that we are recovering when the US economy has not changed from a fundamental perspective .

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