Been reading about the commodity bubble and crash of 2008. It is interesting to try to understand how the motion of money that causes the commodity bubble. At first, I was thinking that money can move into a commodity class (as in be stored) but in reality, someone is exchanging a commodity for that money, which breaks that model. I wanted to model a change in price as a function of the amount of money that goes into an equity, but that doesn't seem to be the case. What basically happens is that the money is exchanged for a commodity or equity and the transaction ends there.
The value associated with an equity is the result of it's instantaneous trading price and there is a disconnect when the value of the equity is tied directly into the "real" money supply and the physical commodity.
Assume a closed system of $1 billion dollars and 100,000,000 tonnes of copper:
- Let the price of copper be $10/tonne, the total value of this market is $2 Billion
- Let the price of copper be $30/tonne, the total value of this market is $4 Billion
Just because the price of copper was more expensive in the second case at $30/tonne vs $10/tonne does not necessairly mean that one economy is more "rich" when the amount of physical resources remain the same. I would be much happier to if I (and others could) a good $100,000 house versus a terrible $500,000 bad (top of the line) one.
I think that there is a gap if the measurement of "wealth" is "money."
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