Commodities, the Dollar, and the Collapse of Lehman Brothers

The financial press, we think, has been overlooking an important possible explanation for the significant decline in commodities prices and appreciation of the dollar over world currencies.  The missing explanation is vital to understanding the macroeconomic circumstances that underly today's business climate and without which will lead managers to make unwise decisions about the future of their companies and apply strategies that will not work in the present context.  It is also leading the nation's policy-makers to pursue potentially disastrous inflationary monetary and fiscal policy.  

The headlines across the financial media have declared the decline of crude oil, other commodity goods, and gold (to a much lesser extent, which in and of itself indicates widespread market fears of coming inflation) are the result of the recession.  Simultaneously, they report, the dollar has appreciated against the Euro and other global currencies because the international markets still view the dollar as a safe haven.  These explanations are inadequate at best, and possibly extremely misleading.

What is overlooked is the impact of the collapse of Lehman Brothers (and other highly leveraged trading firms) on the speculation taking place in the commodities and currency markets.  Lehman Brothers filed for Bankruptcy protection on September 15, 2008, roughly coinciding with what was that time the lowest point of the Euro against the Dollar in a year.  Since the decoupling of Lehman, the Euro has plummeted.  The ensuing credit crisis has made the type of leverage previously employed by Lehman and other securities firms virtually impossible to accomplish.  

The failure to examine the effects of the untangling of massively leveraged positions means that the deflationary myth will lead many people to plan for dropping prices in the long-run, in spite of the significant increase in M1 and the continued promise from the Federal Reserve to lower rates further in necessary, combined with a Congress that is dedicated to spending massive quantities of borrowed money to try to bailout failing industry, expand US infrastructure, and pay for expensive new health care policies.  

Politics aside, business managers need to understand the macroeconomic realities of the current crisis if they are to keep their firms solvent during the next several years.  The end of highly leveraged speculation is an important piece of that puzzle.