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Over past decades, countries around the world became increasingly reliant, through rising exports, on US consumers. As a result, when the US economy ran into trouble the result was a ripple effect felt throughout the world economy. Therefore, in the past when global demand diminished, raw-material costs also decreased. As a result, the dollar was better able to withstand such declines, because with growth slowing around the world and the Fed acting in response, markets and interest rates outside of the US usually were moving in the same direction. This effectively aided the US in times of economic downturn, essentially keeping commodity prices in check. So why are commodity prices currently increasing despite the Fed actively reducing interest rates and the falling value of the dollar? After so many years of prosperity could the US economy be falling behind?

The primary reason raw-material prices are high is that the rest of the world's economies appear healthy despite slowing growth in the US. Secondly, the weakening of the dollar has contributed to the rise in raw-materials prices. Nations that have maintained the strength of their currency have not been as effected by the higher commodity prices such as the sharp increase in recent oil prices. Clearly the rest of the world is now playing a bigger role in global growth and is not completely dependent upon the economic output of the US. This trend coupled with the recent credit market issues within the US and the subsequent rate cuts by the Fed could push the dollar even lower, further slowing the economy. However, it has yet to be seen if the rest of the world could endure a significant economic downturn in the US. Only time will tell if we truly are experiencing a shift in economic powers.

Category(s): Random Thoughts
Posted by Jon Grupp at 08:42 PM | Permalink | Comments (0) | TrackBacks (0)