buyers' strike

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Assuming that we get a buyers' strike in the
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or （less likely） a revival of good sense in the Fed and Treasury, inflation is unlikely to soar to over 30% and thus oil is unlikely to trade around $200. In such an event, interest rates would be increased to begin the lengthy task of wringing inflationary forces out of the system. That would reduce the flood of liquidity in international markets, which would have two effects. First, it would reduce the rate of world growth, affecting particularly those countries such as India and Latin America whose fiscal （India） or balance of payments （most of Latin America） position was already somewhat weak.
A good healthy "buyers' strike" would then push up Treasury bond yields, probably forcing Bernanke's resignation （as it did the resignation of his predecessor G William Miller in 1979） and force a tighter monetary and fiscal policy on the US powers that be. It is a consummation devoutly to be wished; one's only doubt is that inflation has been rising steadily now for several years and yet Treasury bond yields remain stubbornly around their levels of 2004. Continued heavy buying by the less than stellar intellects of Middle Eastern and Asian cash-rich central banks could prevent a catharsis that all should desire.
Second, it would greatly reduce the loan capital available to international speculators, which have been an increasingly important factor in rising oil, gold and commodity prices in the last year. There are reports that hedge funds have already been compelled to reduce their leverage to a maximum of five times capital. I would tend to be skeptical of such reports, but clearly if interest rates were forced upwards the arithmetic both for hedge funds and for those who lend to them would change radically.
That scenario, of slowing world growth, particularly in markets with heavy real estate exposure （such as the US, Britain, Spain and Ireland） or in over-leveraged emerging markets, would be devastating for commodities markets. Speculative demand would quickly be removed from them, partly because of the bankruptcy of the speculators, and real demand would also be somewhat reduced. Commodity prices would fall towards equilibrium levels.
In the case of
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, the fall towards historic levels would be rapid. Production is already being ramped up because of current high prices, so it is likely that in 12 months time there will be a glut of most crops. The ethanol from corn politically inspired disaster is registering even in the minds of US politicians, so even if the bizarre and counterproductive US subsidies for that process are not repealed, they will not be extended. World food consumption is increasing only relatively slowly, with some change in mix as wealthier Indians and Chinese eat more meat, so with a further slowing in consumption growth it will take very little time for production to catch up.
For gold and silver, the trend depends on the outlook for global inflation. If low interest rates are allowed to persist until inflation has got a real grip, it is likely that inflationary expectations will worsen, driving up gold and silver prices further.

Even when interest rates are raised, confidence in government firmness
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against inflation will probably be slow to revive, so speculators and investors may continue to hold gold and silver as a hedge - after all, with rising interest rates stock and bond prices will be declining, so there won't be an obvious alternative home for their money.

Thus the equivalent 2012 prediction to $200 oil, $2,000 gold, may very well be possible, although it is likely that such a price will be seen only early in the year, with the overall trend by then, perhaps two years into the fight against inflation, being firmly downwards.

Finally, the oil price itself. Two factors have been driving the rise in oil prices. One, rising demand, has been discussed in relation to food and can be expected to follow the same pattern. As the world economy slows, demand will increase more slowly, while the speculators will be squeezed out of the market by higher interest rates. Nevertheless, absent changes on the supply side, one might still postulate 2012's oil prices to be close to current levels.

It is on the supply side that a global recession makes the most difference. Here the continually rising price of oil over the past five years has awakened primitive nationalism in oil-producing countries, causing them to maltreat foreign oil companies and attempt to squeeze as much government revenue as possible out of the oil goose that is laying so many golden eggs.

New oil discoveries are becoming more and more difficult because in only a few countries are oil companies with modern exploration techniques given the right incentives to search aggressively for oil. Even Russia, the white hope for greater oil production five years ago, has seen its production begin to decline in 2008, while Mexico （closed oil sector）, Venezuela （socialist fruitcake） and Nigeria （kleptomaniac government that taxes oil revenues at 98%） have all seen oil production decline by more than 10% since 2006.

There are a few counterexamples: Iraq's oil reserves have doubled since that country was reopened to international exploration in 2003, while Brazil, whose Petrobras enters freely into joint venture agreements with Big Oil, has made major new oil discoveries recently. However, while oil prices continue to rise the search for new oil sources is likely to be restricted to only a limited number of geologically promising areas.


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