Baby Boom or Bust

Last week we looked at the history of commodity supercycles, zooming in on the period immediately after the Industrial Revolution when the price of corn rose at a staggering rate. We looked at the factors underpinning a supercycle using the power of historical hindsight. This week, I want to take a different approach, instead looking at the complex and competing macroeconomic factors at play. That conversation begins with another period in which commodity prices rose.



The Spanish Price Revolution took place between the second half of the 15th century and the first half of the 17th century, and is defined as a series of economic events that led to high inflation rates across Europe. Commodity prices rose roughly sixfold over that 150 year period, leading to a dramatic shift in the global power structure. There is an enduring controversy over the cause of inflation in that time, with historians favoring the view that population growth led to increased demand for commodities. Economists, however, blame the devaluation of silver.



Maintaining rule over large parts of the world was an expensive endeavor for the Spanish Empire. In 1545, Spain found a valuable source of revenue in the Cerro Rico mountain, or Rich Mountain, in Potosí, Bolivia. Over the 150 years that followed, the Spanish mined about 150,000 tonnes of silver from Bolivia and other sources around South America, using the money to finance global expeditions. At first, having more silver coins allowed the Spanish to buy whatever they wanted. But that fun wouldn’t last. As more silver entered circulation, prices across Europe rose dramatically.



While the devaluation of silver certainly makes for a great story, there remains a fundamental issue of timing. European inflation actually started before the Spanish started mining. So, we have to hand it back to the historians to consider the full impact of population growth and urbanization. Even 400 years later, this debate between economists and historians remains unsettled. What is the lesson in all this for our current supercycle evaluation? Though population growth is probably not the sole factor, it is a pretty big one.



Back to present day. Even as every major economic institution is talking about the next supercycle, very few are weighing the impact of changing global demographics. When the COVID crisis first took hold, some playfully speculated that there would be a spike in births in nine months time. Data is now emerging that the reality is a bit more complicated. Reports from the US and China suggest a 15% decrease in the birth rate for 2021 compared to 2020. However, the data is still out on less developed countries. Anecdotal reports suggest that the pandemic may actually be exacerbating existing global population trends, with increased birth rates in less developed countries.



The commodity supercycle of the 2000s was driven by a growing population, industrialization and urbanization in places like China. We know that agricultural prices are especially dependent on global economic and population growth. Since the data is still out on much of the world, we’ll have to wait and see whether global birth rates ultimately expand or contract relative to pre-COVID times. Ultimately, the big question is this: will the next boom in demand come from places like China where birth rates are falling, or places like India and Africa? If we are experiencing the dawn of the next supercycle, who is driving it?



Next week, we’ll shift away from macroeconomics to examine the microeconomic forces at play as prices rise, based on data from Glowlit.