Thursday, March 08, 2007

The boom that keeps on giving... and taking away

It's funny how the simplest of things in life can help us understand the most complex of problems.

When we go shopping, the amount we pay for a loaf of bread or the cost to fill the tank of our car allows us to realise what is happening in the world around us.

In case you hadn't noticed, both of the above have been getting rather expensive lately.

This is because a booming world economy just keeps on booming.

Consequently, any decline or "popping of the bubble" can only offer temporary relief from an unprecedented increase in the cost of living that doesn't look like losing momentum any time soon.


A few years ago I wrote on my blog that oil prices had risen so rapidly that it was a sure sign of a bubble.

That was in 2004, when oil prices rose from $30 per barrel to $50 within less than a year.

I expected a sharp downward correction to follow, and sure enough by the end of 2004 oil had fallen back down to $40. All well and good.

Until what happened next.

Oil prices then went on to almost double to nearly $80 within 18 months! Since then, they have fallen back down to $60.

Gyrations in the price of oil might seem like the movements you would expect to see in any financial market. But very few markets are as important as the one for oil and as difficult to predict.


It has taken many years for economists to understand the impact that China, India and other developing economies have had on the rest of the developed world. In fact, this understanding remains patchy at best.

China is especially tricky.

What has now become the biggest producing nation is the least accountable. We just don't know what's going on over there.

However, what we can measure is the effect that China's economy is having on the rest of the world. In particular, through an increase in the price of commodities, most importantly oil.

Which brings us back to our loaf of bread.

The next time you see higher prices at the supermarket or read about the rising cost of living, remember that much of this increase can be attributed by what is happening elsewhere in the world, particularly in China.

Whilst countries like China are helping to keep the world economy booming, they have also left a rather large bill for the rest of us to pay.

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