 | A Public Transport And Green City Manifesto For The Federal Election | The Oil Drum | Oilwatch Monthly - November 2007 |  |
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As Warren Buffet said, when the tide goes out, we find out who has been skinny dipping. It is becoming increasingly evident that a lot of the financial sector has been a virtual nudist colony.
My forecast for the indefinite future: deflationary trends in the auto/housing/finance sector, with inflationary trends in food & energy prices.
I would guess that we disagree on our respective definitions of inflation/deflation. To me these are monetary phenomena and cannot occur simultaneously, but I interpret you to mean rising or falling prices as inflation or deflation respectively. In that sense, one can have both trends simultaneously in different sectors, but IMO calling it inflation/deflation is misleading.
I would agree with you that food and energy will become less affordable in the future. In other words, I expect their prices to go up in real terms, although they would probably fall in nominal terms during a monetary deflation.
Hi Stoneleigh - what do you call price changes then?
Price changes are simply price changes, and are often the result of underlying changes in the money supply. For instance, if the money supply doubled with nothing else changing, you would expect nominal prices eventually to double as well (keeping prices the same in real terms).
However, nominal prices can fall as the money supply expands, as has been the case with cheap goods from China due to globalization. A larger money supply did not ignite a wage-price spiral as downward pressure was maintained on wages by foreign competition willing to work for less. Cheap labour, cheap energy and foreign competition has meant cheap goods. When prices fall in nominal terms while the money supply expands, then prices are falling very steeply in real terms.
Prices tend to fall in a deflation as the money supply contracts rapidly, but one can envisage circumstances where that would not be the case, or would be the case only temporarily. For instance, the price of oil should fall in nominal terms, at least temporarily, in a deflation, but the resulting disruption could then reduce supply by as much as deflation had reduced demand, or more so. In that case, oil could rise in nominal terms even while the money supply was falling, which would mean oil going through the roof in real terms. This is in fact what I'm expecting to happen over the next few years, in other words except for the terminology I agree with Westexas.
I have often wondered about how a strict money supply based definition of inflation/price increases handles the normally accepted law of supply and demand - that is, price changes to reflect supply and demand.
In other words, I don't think the price of grain is rising merely because of money supply issues - I think even if the money supply had remained completely static, the price of grain would have risen as the amount available on the world market declined - Ukraine's forbidding exports, for example, or Australian drought, or lowest stockpiles for several decades, or increasing imports from nations such as China and India.
I think 'inflation' as a money based concept is an attempt to hide reality, and not reality itself.
I think 'inflation' as a money based concept is an attempt to hide reality, and not reality itself.
Inflation as a money concept is far older than the present 'problems'. The Austrian school of economics and how the US used to run things before the 1970's, if my memory is correct.
I believe West Texas assumptions will be proven correct. Its is possible to an asymetric form of inflation/deflation. As the dollar weakens, prices for imports will rise which caused decreased consumption resulting in higher unemployment and declining asset prices. It seems very likely that dollar will continue to decline for a very long period and and assets such asautos, real estate will decline as the credit cycle for american consumers tightens. Its likely that as the US will continue to weak as foriegnors look away from the US for investment growth and perhaps the Fed drives rates lower in order to drive growth.
I think as long as Oil and other strategic commodities and goods are priced in dollars, countries with large dollar reserves will purchase them with their reserves. An example would be China and Japan trading US dollar reserves for oil & gas. As these dollar holding are released into the market it will weaken the dollar. However, since these dollar won't end up in american consumers hands, americans will face deflationary forces.
Consider the collapse of the Argentina dollar a few years ago. Imports became very expensive for Argentinians, as their currency became nearly worthless. During this period the Argentinians suffer deflationary forces, as unemployment soared, and they could not afford maintain their lifestyles.
If the Oil and other strategic commodites are no longer priced in dollars, it likely means the US is officially bankrupt. It seems likely that more exporters will shift away from the dollar. Some are already accepting payments in other currencies. At some point some might refuse payment in US dollars starting a trend which removes the US dollar as the worlds reserve currency. I think the US would have a very rough time if the dollar is no longer the worlds reserve currency.
If the Oil and other strategic commodites are no longer priced in dollars, it likely means the US is officially bankrupt. It seems likely that more exporters will shift away from the dollar. Some are already accepting payments in other currencies. At some point some might refuse payment in US dollars starting a trend which removes the US dollar as the worlds reserve currency. I think the US would have a very rough time if the dollar is no longer the worlds reserve currency.
And thus the real problem with "peak oil" which will bite quite hard.
Stagflation ??