We watch oil prices fluctuate all the time. Of course, oil gets a lot of attention because it has visible and sometimes significant consequences for the rest of the economy. Other commodities may not enjoy the same status, but they often suffer the same fate of volatile prices. The FRED graph above tells the recent story of sugar. It’s remarkable that the price of a commodity produced and used across the globe can almost double for a while and then return to its original level. In fact, as the graph below shows for an earlier period, this volatility can be even more extreme.
What does it take to generate price spikes like these?
Supply issues, such as a world war
Poor harvests in the major producing regions
Political issues (For example, Cuba is a major producer of sugar cane.)
New uses, such as ethanol produced from sugar
Attempts at manipulating markets
In a way, all these factors combined to create the extraordinary sugar spike in 1920: World War I essentially shut down the sugar beat harvests in France, the U.S. Congress considered buying the entire Cuban harvest of sugar, and a speculative frenzy ensued.
Construction activity fluctuates with the weather and overall economic activity. In fact, it fluctuates much more than the economy in general, as many episodes of economic overheating and collapse have shown us. But construction has many facets that aren’t visible unless we look closely at the details by sector. The graph shows two types of construction that have changed quite dramatically over the past few decades: The building of religious edifices has nearly come to a stop and is now about a third of what it was 15 years ago. And the graph doesn’t even account for the impact of inflation. Contrast this with the rise in construction for amusement and recreation, which was about equal to religious edifices back in the early 1990s and is now five times as large.
Real negative interest rates are easy to imagine when inflation is higher than the interest rate. But nominal negative interest rates have long been thought of as either inconceivable or unsustainable. Yet, in recent years, several European countries and Japan have made negative nominal interest rates a reality. The most extreme case seems to be Switzerland, which is featured in the top graph: The spot rate, the 3-month LIBOR, and even the 10-year government bond rate are all negative now and have been for several years. How is this possible?
This isn’t a case of an economy that needs major stimulus through low interest rates. Rather, it’s an export-focused economy whose currency has a strong tendency to appreciate; in fact, the Swiss franc is considered a refuge currency in times of crisis. The crisis at hand involves the euro’s various troubles in recent years, including the debt problems of some of its member countries. Switzerland has avoided these troubles and has even managed to achieve successive government surpluses. So it’s easy to understand why there’s so much demand for Swiss francs and bonds. But so much demand typically causes a local currency to appreciate, which would make exporting more difficult. The Swiss National Bank, therefore, has adopted a policy of negative interest rates to make the franc less attractive. Interestingly, the effect permeates the Eurodollar market as well, as shown in the bottom graph.
How these graphs were created: NOTE: Data series used in these graphs have been removed from the FRED database, so the instructions for creating the graphs are no longer valid. The graphs were also changed to static images.