When Markets Collide....

One of the current books I am reading is entitled "When Markets Collide: Investment Strategies for the Age of Global Economic Change."  It is a fascinating read, and my mind is being stretched in every direction.  As we enter the day of increased global economic policy and interdependency in multilateral agreements and policies, it seems as if it is evermore important that we as humans are aware of what is happening in the world.  This book has brought a few things to light, one of which I´d like share here.

Main Idea:  Commodity Prices are rising exponentially.

According to principles in this book and those of basic economics, there are three demands for money:  transactionary demand, precautionary demand, and speculative demand.  

Transactionary Demand- This is our use of money as a medium for everyday purchases (i.e. cars, homes, food, clothing, insurance, education, etc.)  This demand is the foundation for the exchange of basic goods and services.

Precautionary Demand-  When the kids leave the house and mom says, "Here, take this $20 just in case something happens," the mother is applying life´s precautionary demand for money.  This is what we would think of as an emergency fund, used to cover any unanticipated development that requires finances.  It is the "just in case" demand.

Speculative Demand- This demand for money is most necessitated by entrepreneurs and financial investors, as it is the need of exploiting possible wealth-creating opportunity.  This demand for capital can also exist within the context a simple home mortgage, if it is the owners intention to generate capital through that mortgage.

In the past 5-7 years, we all know that China and India have experienced astronomical economic growth on a global scale.  So much that they now have the largest Sovereign Wealth Funds in the world which they have invested in US Treasury Bonds, allowed the United States to hand out so much "free money."  But what is happening as their economies grow? Their citizenry is experiencing, for the first time, the ability to operate significantly and at consumeristic levels within the transactionary demand sector of economics.  This puts a higher demand on commodity prices, because now instead of the United States being the sole consumer, we are sharing our consumeristic culture with those of China and India.  

This is the point at which markets collide and details get sticky.  All of these commodities, of which the US has been the main consumer in the past century, are limited.  They are things like: oil, copper, grains, gold, natural gas etc.  In recent years, China´s demand for world oil has increased from 2.9% to 8.4%.  This puts pressures on prices, and as demand goes up for limited-supply commodities, prices will skyrocket.  

My thought is this:  we as Americans are so used to operating at high levels within the transactionary segment of economics as we consume, consume, and consume.   Perhaps the days of unchecked US prosperity are closing as we lose our dominance in the areas of product creation, capitalistic leadership, and technological advantage, and the day is nearing in which we should check our expenditures before we embark on new consumption.  Or even better, perhaps we switch paradigms entirely and enter the precautionary and speculative sectors for capital demand.

In conclusion, When Markets Collide....Things Change.  Let´s be ready.