<DrumBeat: April 12, 2007The Oil DrumJeremy Gilbert's Comments on TOD Saudi Analysis>

248 comments on The Case for Inflation from a Plateauing Supply

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GreyZone on April 12, 2007 - 10:45am Permalink | Subthread | Parent | Comments top

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

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jeffvail on April 12, 2007 - 12:28pm Permalink | Subthread | Parent | Comments top

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.

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kjmclark on April 12, 2007 - 12:52pm Permalink | Subthread | Parent | Comments top

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.

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GreyZone on April 12, 2007 - 4:25pm Permalink | Subthread | Parent | Comments top

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

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kjmclark on April 12, 2007 - 4:46pm Permalink | Subthread | Parent | Comments top

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.

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GreyZone on April 12, 2007 - 5:48pm Permalink | Subthread | Parent | Comments top

Whether he labeled it or not, he clearly stated his definition.

Inflation is the decrease in purchasing power of a currency due to an expansion in the supply of that currency ('printing money') and the interest rate offered by that currency's central bank.

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

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Halfin on April 12, 2007 - 6:08pm Permalink | Subthread | Parent | Comments top

(Comment deleted, I was confused.)

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mbkennel on April 13, 2007 - 1:26am Permalink | Subthread | Parent | Comments top

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.

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Black B. Gorilla on April 12, 2007 - 2:59pm Permalink | Subthread | Parent | Comments top

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.

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