248 comments on The Case for Inflation from a Plateauing Supply
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248 comments on The Case for Inflation from a Plateauing Supply
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The tanker rates in the Persian Gulf have been falling for eleven days with an adequate supply of tankers for the amount of oil that must be loaded. That is deflationary.
On the other hand the price of crude was up a dollar this morning. That is inflationary.
Part of inflation is by will of government decision. Whether or not a government can balance its budget. The cost of borrowing money. The amount of money in circulation. The amount of money the Fed requires banks to keep on deposit to cover for bad loans, private depositors needs to withdraw funds, etc.
Shortages of gasoline resulting in price spikes in gasoline might cause the price index to rise, even though the price of tanker transport might be falling.
Typically nations experienced more inflation during times of war than times of peace.
Remember: Price increases are not inflation. An increase in the money supply is inflation. When there is no increase in the money supply and the price for oil increases, the price of something else (say, SUV's) will fall. We have never experienced a constant money supply so we do not know deflation. But deflation was present thorughout the 18th and 19th centuries, in those periods when the money supply (ie gold) was not increasing faster than the world population and economy. South Africa, California, and Australia all sparked some bouts of "inflation" separate from the wars.
You beat me to it. The price of oil going up in not in itself inflation. The price of computers going down is not deflation.
That said, I agree with JV's conclusion though maybe not for the all of the same reasons. The elite can escape the devastation of inflation through posession of hard assets, though they may be threatened ultimately by the ensuing consequences. The accumulated debts to pensioners cannot be openly repudiated on a sufficient scale: they must be inflated away.
It's hard to see any power bloc benefitting from deflation. Theoretically, deflation benefits bondholders. But deflation would render debts owed uncollectible. The housing meltdown is already showing that, and we see this in already mildly inflationary times (compared with what's to be). Deflation here would cause revolution in China whose factories would idle.
The biggest thing, of course, is the military and intelligence machine. This is what undergirds tha value of the dollar now. This is what allows one to hope that the dollar, which is not backed by anything else, is at least backed by oil, theirs, oops, I mean ours. It must be fed, and can only be fed with inflated dollars. And if it isn't fed, then the sole backing disappears and we are back to the Weimar days. The elites all over the world fear the dam's breaking which is why they all appease a regime they detest. These guys have the world by the pashwingi -- for now.
Actually I see inflation as more harmful to the "elite" than to ordinary people. Inflation primarily benefits debtors, by allowing them to repay their debts with cheaper money than they borrowed. As a general rule, the wealthy loan money to the poor, rather than the other way around. Therefore inflation will benefit the proletariat at the expense of the elite.
"Theoretically" you are right. They lend. But with an implosion they don't get paid back at all. People are already going into default. Deflation would mean economic implosion -- far more would default.
Next, the elite lends, but not their own money. They lend the middle class's money, their pensions, college savings, etc. You don't get into the elite lending your own money -- no, no, no.
Therefore the elite borrows, borrows from us. Now I said the proletariat goes into default. But not like the elite goes into default. The elite goes into default by eliminating our pensions, by running up massive govrnmental debts that will be the excuse for tearing up all contracts with the common folk. The only contracts that aren't torn up are the tax reductions for the very wealthy. The military-industrial complex doesn't need a contract -- it's implied.
The elite can play the world's assets, unlike you and me. That's what globalization is really all about -- not trade so much as free movement of capital. That, by the way, is why the Soviet empire crumbled peacefully. The Soviet elite could not walk away from their rust belt -- it wasn't capital. They envied the Western elites. They thought they would be better off with capital. That they were outmaneuvered is another story.
This is a fascinating thread, but perhaps we should simplify it and take it a step further?
Since there is wisdom in the collective, why not do a simple poll?
"Do you think PO will result in"
a) high inflation/stagflation
b) little meaningful change
c) deflation
d) total chaos
Hal,
I don't quite see it as debtors vs creditors, but more as the prudent vs imprudent. For example, the creditors and debtors in the New Century collapse are very much on the same team when it comes to pressure for a Federal bailout.
The irony of all this is that that the majority of TOD members seem to believe that an inflationary scenario is the most likely outcome. Well, that means that when the credit meltdown comes, those with debt are going to be bailed out by those without debt.
...in which case all those following Westexas' ELP maxim are going to get a big fat bill demanding that they pay for the financial recklessness and profligacy of others.
Not a comforting thought.
But...but... then the already slave-level wages of the poor person become worth even less. Wages of the lower percentages of the working poor have declined in recent decades. The rungs keep coming off the ladder.
Yours is the most common, and in my opinion, the most erroneous view of inflation. A change in the price of a good due to scarcity is NOT inflation. It is simply the market adjusting to the supply of the commodity on hand at a given time. The only thing that can cause inflation is the printing of more money than there are goods and services for that. Then there are more dollars chasing the same amounts of goods and services.
Personally, I do not accept your definition of inflation at all. I doubt that Jeff will either based upon his article.
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
I second what GreyZone pointed out: increase in the relative price of oil due to a new supply/demand equillibrium is a change in price. Decrease in the overall purchasing power of a dollar because the money supply is increasing faster than the quantity of goods and services being purchased is inflation. The issue here is not whether or not the relative price of oil will increase, but rather how central banks will react to the resultant negative economic effects by implementing a broader inflationary policy.
Jeff, I really wish you had described the two definitions of inflation in common use in your post. We're bound to have dozens of posts simply arguing about the definition of inflation. I know it ticks off Austrian school followers, but most people do not agree with the Austrian school definition of inflation. This almost always devolves into a shouting match between the two definitions because people don't specify which definition they're using.
The Austrian school definition isn't "right" and the general level of price definition isn't "right". They are two definitions that are considered equally valid by their different adherents.
Did you bother to read Jeff's article? He stated his definition of inflation and his classical leanings at the very beginning! He doesn't have to repeat it 55 times because someone refused to read.
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
Of course I did. He didn't acknowledge that there are two definitions of inflation and that he was using the less common, but maybe more rigorous, definition. His statement was also a bit ambiguous as to whether he was using the Austrian School definition of inflation or the Austrian School theory of interest rates. If *you* read his statement, you'll see that he referred to the Austrian School WRT interest rates, but didn't indicate that WRT his definition of inflation.
You have to realize that the Austrian definition of inflation is *not* the common accepted definition. Look up the Wikipedia definition of inflation and you'll see this. That *certainly* doesn't mean that the Austrian School definition is wrong, but when you're using an uncommon definition of a commonly understood word, you're better off acknowledging the discrepancy up front and making it clear you're using the less common version.
Whether he labeled it or not, he clearly stated his definition.
How much clearer does he need to be? Is this like "depletion", which many around here confuse with "decline" but which is actually what happens from the time the first drop comes out of an oil well? Do we expect the readers of this site to be conversant with the word depletion and what it really means or the commonly accepted (and incorrect) version?
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
(Comment deleted, I was confused.)
I think it's a little more complicated.
It is sort of an axiom of accounting that this kind of 'inflation' has to occur by printing of money and therefore there is some kind of "conservation of inflation" if money supply (and money velocity) is held fixed.
But let's look specifically at the actors involved. What happens when the price of oil goes up and the money stays fixed.
People who have to buy things made or transported with oil (i.e. nearly everybody) have less buying power, simulating "pure" monetary inflation.
AND
The people who produce oil (Mideast Potenates) have a massive increase in their buying power, simulating monetary deflation.
Of course you can say that this applies to many other goods and services and it is certainly true, but in almost everything else, there is a complex web of interdependencies and we don't see the internal price and income fluctuations as 'inflation', just fluctuations.
It is the specific physical nature of oil that results in such a low-order "collective" effect on nearly all of the non-oil-producing economy that it simulates, for all useful purposes, something that is almost like true inflation from all observable quantities except Dubai bank accounts.
The effect of oil scarcity is simple: transfer of wealth and capital from oil consuming people and nations to oil owning nations. If these oil producers are predominantly out of the country then the effect on your own country is nothing but a broad decline of purchasing power, simulating inflation (in prices) but without concomitant inflation in income.
Hi Greyzone,
I haven't thought this through completely yet but...
While scarcity of a good is not the same as 'printing ' more dollars, with a good like oil and natural gas, the number of dollars chasing this product would increase producing a deflationary reaction in other parts of the economy, but only on a temporary basis. If the money supply remained constant the economy would re-balance but on a lower level.
Imagine taking a sip from a glass of wine -- the gradient would gradually, if no other action taken, return to normal when the glass returned to the table, but at a lower level, this in what might be considered organic bottoms up induced inflation rather than Treasury top down.
I won't labour this further other than to say that I don't think we can view oil as other products. Other products are seeming in this discussion being considered as replaceable, oil isn't.
BTW thanks for the welcomed and appropriate follow up on mine of yesterday.
In the last few weeks a word that I haven't seen for decades: "Stagflation" has been cropping up in the press. Originally coined in the 1970's in response to the oil shocks of that time, the symptoms were economies showing little or no growth, but high inflation and high interest rates.
Probably the underlying cause was the impact of high oil prices working through economies (cost push inflation) leading to escalating prices. Money supply was under government control in many countries then; and governments in response tried to muddle their way through by allowing the money supply to grow in order to mainatain as much economic activity as possible.
Thatcher and Reagan then began "so called supply side" economics and the "miracle" of Thatcherism that supposedly corrected what were perceived as structural imbalances in the major economies.
Of course it was just then that Prudhoe Bay and the North Sea came on stream and the west was able to undo much of OPEC's power to control the oil price. Then we had years of $10 oil and the rest is history, so they say.
Now, oil as a proportion of the global economy is smaller, and thus the impact has been slower to manifest itself. However recent higher prices are working their way through economies. The corn ethanol fiasco in the US is driving up food prices even further. Add to that wall to wall debt in all sectors of the US economy and one begins to appreciate the tightrope the Fed is walking. Hence articles such as this debating whether infalation or deflation is the problem. Stagflation.
It is only a matter of time before the fundamentals take over. They cannot be helf off for much longer.....surely?
Stagflation won't be repeated due to the global economy that we have now, that we didn't have in the 1970's.Back then, wages grew quite abit even though the economy was sytematically hollowed out and turned from manufacturing based to services based. Now, we have a global economy that will only continue to accelerate and theferfore severely limit wage growth. And don't believe that it is all based on jet fuel. The internet has opened up vast frontiers for outsourcing.
So then without wage growth, prices will have to be limited or even collapse as we are starting to see in the housing market.
Nice post.
I just got off the phone with my girlfriend, and she mentioned that her friend at work showed her an article in the New York Times about stagflation today. She had never heard of it before. (We are both in our 30's)
I think it will be like the 70's. Stagnant wages. Inflation in energy and food. CAFE standards will be raised. Conservation will be preached. Wars will be abandoned. Eventually high interest rates will be imposed, and a new wave of cheaper energy will be unleashed on the world. If I had to guess I would say solar, nuclear, and wind will eventually drive down electricity costs, and transportation will go electric. This will probably take the better part of a decade.
So where do you put your money?
I think Energy companies will do well. I expect that earnings from high oil prices will be invested in alternatives. Other companies might just start paying a high dividend.
Gold and silver are a good hedge.
Real Estate probably needs a decade to wipe out the excesses of the last 6 years. That being said, you gotta live somewhere, so those people who have a 30 year fixed mortgage (and can continue to make the payments) will do well in the end.
Toyota seems like a good bet.
Dividend producing stocks.
Land near Railroad stations.
Investment in conservation strategies in your own home (insulation and high efficiency systems) should pay off really well.
Whatever you invest in - just remember to diversify.
I was just a baby in the 70's, so I'm sure I have no idea just how bad it's going to be. Hopefully I can hang onto my job and ride it out.
Garth
Inflation is MONETARY phenomenon. Therefore, neither PO nor anything else must necessarily have any effect on monetary conditions.
Even if oil was $1000 a barrel, in "today's dollars", that would not be inflationary. It would merely be very expensive oil. House prices have also gone up 4x or so during the past ten years. Why isn't that inflationary? Or the cost of medical care?
Now, that said, there is some inflation here, as evidenced by the highest dollar/gold prices in 25 years, and it looks like it will become more intense. Thus, we will likely have inflation and higher real oil prices together.
I've written many thousands of words about this stuff at my site www.newworldeconomics.com.
Of course it is a monetary phenomenon but Jeff's scenario is actually asking what monetary policies will the fed take given the external stimulus of peak oil? And I still think inflation is going to be their primary and initial response.
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett