To see it in its pure form, look at commodity extraction as a sector. Miners invariably delay production while prices rise, because they fear their investment will be wasted (or worse) should prices fall. Eventually prices get so high that the potential rewards of expansion are greater than the perceived risks, so they expand production, find new reserves and open new mines etc.

Since their particular mined resource is in demand, all is well, the market absorbs the new supply, profits rise further for the miners. Perhaps the old cautious management is sidelined for those who think mining has entered some new perpetually expansionist era. (You saw this with banking in the 1990s, for instance).

This is the boom phase.

More mines are opened, more money enters the sector – old hands may even sell out as they sense the maths no longer makes sense except on the thinnest margins at the highest prices (see for comparison commercial property from about 2004-2007).

Typically with mining, eventually either demand eases off because of a slowdown elsewhere in the economy (myriad reasons) or else supply overtakes demand. Both lead to a fall (maybe bearable) or a collapse (bad!) in prices.

Mines that were barely economic at the old prices are now loss making. Companies start to go bust. Mines are put on sale – but nobody wants a mine now, driving prices down lower.

This is the bust phase.

You see similar patterns in all sectors, in different guises. It might be employment costs, investment flows, regulatory changes, all kinds of mounting inefficiencies.

Money supply is just one of many factors. Of course governments while try to increase or choke off the supply of money (and consequently inflation) as part of their management of the economy – with an aim to smooth out the highs and lows – and it’s true the results can vary. But it’s just one small part of the picture, in my opinion.

Thanks to you and Bill for your comments!