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Sunday
Aug242008

One economist is on the verge of letting real world data trump theory.

Economist Mark Thoma has this post applying textbook theory to spikes in commodities prices.  Most telling is his statement that the theory does not explain coordinated price movements across all or many commodities, leading to the possibility that something other than classic supply/demand fundamentals is driving prices.  Could that something be large influxes of speculative money looking for a new asset class and trying to hedge against a declining dollar, which is what non-economists in these markets have been saying for many months?  He doesn't say, but he does get ahead of the herd of mainstream economists by noticing that the real world data don't fit the mainstream theory. 

I posted this comment on Thoma's blog: 

If coordinated moves among many commodities suggest their prices are not being moved by "fundamentals," that proves that some unknown force(s) other than "fundamentals" can move the price of a commodity, and there would be no reason to believe that "fundamentals" are the most likely force behind, or even relevant to, a particular price move.  Sic transit theory. 

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