Holding Daniel Yergin and CERA Accountable
Posted by Prof. Goose on January 10, 2008 - 11:15am
Topic: Supply/Production
Tags: cera, daniel yergin [list all tags]
This is a guest post by Glenn Morton, a geophysicist in the oil industry. For Kerr-McGee Oil and Gas Corp., Glenn served as Geophysical Mgr Gulf of Mexico, Geophysical Mgr for the North Sea, Dir. of Technology and as Exploration Director of China. Currently he is an independent consulting geophysicist, and he is known here at TOD affectionately as seismobob.
This post started when I heard Daniel Yergin, the CERA Energy Analyst interviewed by Larry Kudlow on Sept. 14, 2007 on CNBC. Yergin claimed that the high price of oil was not supported by the fundamentals. My jaw fell to the floor. Last year (2006), the price of oil deserved to plummet by 20% (which it did). The amount of oil in storage tanks was very high. But this year, week on week, the oil in storage has dropped, meaning that the fundamentals do support a higher price than last year. The chart is below; note that in 2007 (red curve) the US storage numbers are way way down from what they were in 2006 and we haven't even had a hurricane.
After the interview, Larry Kudlow said something to the effect that Yergin was the authority on oil and he would believe what he said. Over the past week, I have emailed Larry Kudlow's show twice about this silly claim, but, haven't received any response. I decided to look at CERA and Yergin's claims over the past few years and see if their prognosticative powers were as bad as I suspected.
As a note of confession, I must tell the readers that in 2003 when I was Director of Technology for a large independent oil company, I had a discussion with the VP of marketing for my company. I asked him why on earth we paid for CERA's research when their stuff was constantly wrong. He said he knew that they were wrong but that we always wanted to listen to alternative views. With that I agree, but in the press, CERA is constantly proclaimed to be a 'highly respected' research firm. There may be less respect than is proclaimed. I do agree with my friend, the former VP of marketing, that one should always listen to alternative viewpoints.
Respect is earned. That is what I always told my children. By that standard, CERA does not have my respect. Their predictions have been too wrong too often to win my respect. As a personal note, in 2004, I invested in some energy mutual funds. If I had believed CERA and Daniel Yergin's predictions, that would have been an incredibly stupid thing to do. Since 2002 at almost every opportunity, Yergin and CERA have proclaimed that the oil prices were about to fall. If I had believed them, I would have sold out early and often. As a convinced Hubbert Peaker, I am convinced of the opposite.
The picture below is of three energy mutual funds compared with the Dow Jones Industrials. I own two of them and invested in them because I didn't believe the utter rubbish that Yergin and cronies were putting out.
The Dow is the orange curve. Since 2004 it has gone up by 35%. The other curves are energy mutual funds. The large drops in the prices of the mutual funds at the end of 2006 are dividends. Mutual funds, when they give dividends drop in value. But, if the dividend is reinvested, as I did, then one can take the price history after the dividend and lift it up to the top of the drop. This would mean that the green curve should have a total return of an additional 30%, and the red curve an additional 15%. This means that energy mutual funds have gone up 70% to 120 percent while the Dow Jones Industrials has only gone up 35%. And according to my calculations, allowing the dividends to be reinvested, the total return is over 200%. That gets an oil investment over the past 2 years into serious money territory.
Yergin's predictions, if followed, would have cost someone the opportunity to make a fortune. One of my sons decided to invest in energy mutual funds in January 2007. He is a happy camper. I hope he doesn't ever believe Yergin's or CERA's predictions. Looking at those energy mutual funds (don't ask me which they are, I don't give stock advice, nor am I a qualified broker. Don't blame me for your bad investments), one gets the feeling that there must be a serious reason they are going up. There is: it is called scarcity.
The price of oil has increased similarly. The price of oil has more than doubled, from $34 in January of 2004 to over $81 in Sept. 2007; that is more than a 100% increase. Here is the chart of oil price over that time period.
Yergin, and CERA believe that peak oil is garbage. They said as much.
"Peak Oil theory is garbage as far as we're concerned", said Robert W. Esser, a geologist by training and CERA's senior consultant/director of global oil and gas resources, according to Business Week online national correspondent Mark Morrison (Sept 7). http://energybulletin.net/20418.html
One of the reasons they give for rejecting peak oil is this:
"Peakists' projections of the date a peak would be reached continue to come and go, the most recent targeted around Thanksgiving Day 2005, give or take a few weeks." http://www.cera.com/aspx/cda/public1/news/pressReleases/pressReleaseDetails.aspx?CID=8444
In other words, past predictions have been wrong, therefore peak oil is wrong. What abysmal logic. But, it is interesting to me that the present peak in black crude oil production was May, 2005, and the current peak in world liquids production is July, 2006. See http://home.entouch.net/dmd/oilpeakispast.htm
That aside, let us hold CERA to their standards, if past predictions are wrong, then present predictions are wrong and see how they live up to their own standard.
We are going to plot CERA's and Yergin's statements on top of the oil price curve. A Google search of news archives brought forth the following snippets, which can be garnered free from the search. I have simply copied the search results. The source is first, the price and owner of the report is second followed by the date. Beneath it is the quote, which I put in quotations. The search results are put in italics to differentiate it from what I have to say afterwards.
February 2002
Technology may help combat volatile oil prices, study suggests....
$6.95 - Oil and Gas Investor - AccessMyLibrary.com - Feb 1, 2002
"oil prices are projected to average $20 a barrel in 2002, compared with approximately $26 in 2001, CERA president Joseph Stanislaw said."
What was the reality? Well in 2001, according to the BP Statistical World Review of Energy, the price of WTI averaged $25.93. CERA predicted $20, but BP says the actual number was $26.16--totally in the wrong direction. The price went UP, not down as CERA said.
February 2003
US commercial oil stocks reach low
Subscription - Financial Times - Feb 20, 2003
"Cambridge Energy research Associates (Cera), the Boston-based consulting group, expects world oil prices to drop after any war to the low to mid $20 range."
The reality was that the average price in 2003 was $31.07 and the price never did fall into the low $20's range after the Iraq war.
February 2004
As Demand Rises, Oil Firms Focus on Finding New Reserves, Expanding...
$6.95 - Dallas Morning News - AccessMyLibrary.com - Feb 11, 2004
"Oil prices are expected to remain in the upper $20 to low $30 per barrel range through 2005, CERA Analysts said Tuesday. "
The reality was that the price ended up at $65 at the end of 2005. Wrong again.
June 2005
Putting a cap on oil supply worries.
Subscription - Dallas Morning News - HighBeam Research - Jun 22, 2005
"The growth in oil supplies could force prices well below $40 a barrel as early as 2007, The CERA report said."
This is a full paragraph report on the same claim
"In
a June report, CERA said it believed that between now and 2010 there will be a
substantial increase in worldwide oil production capacity, providing a supply
cushion of 6 million to 7.5 million barrels per day that could cause oil prices
to "slip well below $40 a barrel as 2007-08 nears."
Peter Enav,
"Uncertain Saudi Supplies Hold Key to China's Growing Thirst for Oil,"
Pittsburgh's Post-Gazette, http://www.post-gazette.com/pg/05236/558766.stm
This year, started at oil in the mid $50s but as everyone knows, we are now at $80/bbl. Cera's perfect record continues.
It was this prediction, which caused Jeff Brown to declare "Daniel Yergin Day," when, contrary to Yergin's prediction of $38/bbl, the price reached twice that value in little more than a year! http://graphoilogy.blogspot.com/2006/07/daniel-yergin-day-july-13-2006.html
2006
As near as I can tell, CERA and Yergin took 2006 off and didn't predict future prices. Indeed, the few comments made in 2006 seemed to indicate that Yergin and CERA were beginning to get the idea that the fundamentals of supply and demand were favorable for higher prices. Yergin was quoted as saying:
"The world oil market is in the grip of a slow-motion supply shock, in which a $70 to $75 barrel price reflects an aggregate disruption of over 2 million barrels a day," Daniel Yergin, the chairman of Cambridge Energy Research Associates, said in remarks this week at a Washington energy conference.
http://www.signonsandiego.com/uniontrib/20060427/news_1b27oilecon.html
But, it appears that he was right, but for the wrong reasons. On July 15, 2006 he ascribed the rise in price to geopolitical tensions:
CRUDE
TOPS $78 PER BARREL ON M-EAST, NIGERIA SUPPLY WORRIES
Subscription - All Africa - HighBeam Research - Jul 15, 2006
"the oil price has become a register of geopolitical tensions and fears," said Daniel Yergin, who heads Cambridge energy Research Associates."
According to this theory, I presume, if Rodney King had his way, and we could all just get along, oil prices would plummet. If this is the true explanation for the rise in oil price over the past 5 years, the world must be becoming more geopolitically tense and fearful.
June 2007
But as we enter 2007, Yergin and CERA are back pounding the drum that oil prices will fall. This is what I heard Yergin imply on Larry Kudlow's program. It reflects what he said in print earlier in the year. In June, 2007, a Yergin interview reported this:
"ISTANBUL,
June 27 (Reuters) - World oil prices will drop to the low $60 range by the
beginning of next year as long as the security premium in the world oil market
does not rise, said Daniel Yergin, chairman of Cambridge Energy Research
Associates."
http://uk.reuters.com/article/oilRpt/idUKL2727647820070627?pageNumber=2
At the time of that prediction, oil was $67.84/bbl. Today, it is hovering at $82. The one thing I know personally. If Yergin and CERA ever predict the price of oil is going through the roof, I will sell all my oil investments. It will be a harbinger of doom for the price of oil.
September 2007
I watched a video from CNBC where Yergin made these points:
- $80 is not supported by the fundamentals unless there is a war with Iran or a hurricane.
- $85 or higher this year
- Next year we will see a build up of supply
We will watch to see if this prediction happens.
For graphical enjoyment, we will show these predictions against the price of oil for the past 5 years.
It would seem to me that CERA's numerous predictions of the fall of the price of oil have been false every time. The chart above speaks volumes about their inability to foresee even the near-term future. Maybe their view of the world energy situation is flawed, leading them to be overly optimistic about the future price of oil.[sarcastic mode on] nah that couldn't be! They are the CNBC oil analysts![sarcastic mode off] Like many in the peak oil community, I use Yergin and CERA as a contra-indicator for how I should invest. So far, it is working quite well.
Your VP of marketting is on to a very lucrative strategy. Pay to find out what Yergin says and then do the opposite.
I agree. I noted in late June, 2007 that Yergin had sent out a strong "buy signal" for oil, by asserting that oil prices would be back down to $60 in 2008. As I have previously noted, the "Yergin Indicator" suggests that oil prices will trade at about twice Yergin's predicted price within one to two years of his prediction. Do a Google Search for Daniel Yergin and click on "Daniel Yergin Day."
My take on Yergin's role in the Iron Triangle:
Net Oil Exports and the “Iron Triangle” (July, 2007)
http://graphoilogy.blogspot.com/2007/07/net-oil-exports-and-iron-triangl...
As I have also suggested, perhaps we should be using Yergin's predictions as an opportunity to unload highly energy dependent assets on the true believers in the Yerginite Community.
I have always admired Yergin Day and am quite impressed with it. How many Yergins are we now at?
Presently at 2.5 Yergins (one "Yergin" = $38 per barrel)
Its like the joke of the research assistant who sent away a paranormal test subject because they always called a coin toss wrong...
Just because Yergin gets it wrong so often doesn't make him useless. Rather he typifies a particular mindset, a particular view of the world. Understanding what that worldview thinks is useful because it shows you how they will react.
Yergin exemplifies the type of 'analyst' that is always searching for local upsets to explain away price movements. They are invested in a continuing growth model and 'status quo' and turn away from any contrary evidence. When they start to change this mindset we can expect to see a shift in the market - an acceleration in price for one. Keeping tabs on that tendency has value.
Yergin and his ilk are probably why we are already not accelerating past $120 a barrel. We should thank him for that.
Eagles soar but weasels don't get sucked into jet engines
Is it possible CERA is doing just that? Trying to calm things down and prevent a train wreck?
No, I have a friend who tried to submit an article to CERA week talking about peak oil. He got a really nasty reply rejecting the paper. They simply ignore peak oil, which at the very least is a viable position which needs to be discussed, not ignored.
The reverse CERA investment strategy?
I have heard of pump and dump...maybe this should be called slump n dump.
I think you want to say red curve?
Chris
got it...thanks!
http://science.reddit.com/info/653m5/comments/
http://business.reddit.com/info/653me/comments/
http://digg.com/business_finance/Holding_Daniel_Yergin_and_CERA_Accounta...
The first paragraph says that the blue "curve" (line) is 2007. But the legend on the first chart says that blue is 2006. I think that the first paragraph should say red.
got it...thanks!!
People, especially smart and successful people, focus on the patterns that led to their success. Peak Oil, whether its here in full force yet or not, will change the 'rules' by which traditional analysts will view oil markets. I have been writing here for over 2 years on 3 topics that to my knowledge, CERA doesn't address:
1)the difference between actual production and productive capacity. Actual production is what moves the supply side half of the market price equation, and will always be less than productive capacity.
2)the difference between net and gross. The easy oil has largely been found, though we are still pumping it. The new oil costs much more to procure, in both energy and dollar terms. So over time, as depletion rates increase in the 'found oil', this production is being replaced by expensive oil, which takes more of a (consuming) countries oil and gas to devote to its delivery, freeing up much less than 86mbpd than it would have when all the oil was 'easy'. Also, things like ethanol, tar sands and Natural Gas Liquids are being included in the headline oil production numbers of CERA - these have smaller kilojoules per unit than regular oil (NGLs and ethanol 60-70% of oil). It also requires much more energy to create these alternative liquid fuels, energy that has to be drawn from the total pie. So what was worth a million barrels under the 'old rules' doesn't have the same dampening impact on prices, nor productive society under the 'new rules'.
3)Oil optimists neglect human social behaviour. Once the perception of scarcity arises, whether its justified by Peak Oil or something else, peoples behaviour will change to be more consistent with Hotelling theory - where they attempt to maximize rents by 'hoarding', keeping energy in the ground for higher prices in the future etc. Also, many of the exporting nations will need more energy themselves, so less will be available for importers. And finally, energy is finite, dollars are not. We cannot look at a Gaussian distribution of oil and expect that the second half will just look like a mirror image of the first. Energy is worth orders of magnitude more than its dollar price. Conservatively if its 15,000 hours of human labor - thats $350,000 a barrel at $20 an hour. Since the market has always been adequately supplied or had substitutes, crude has traded at the marginal barrel, going up on short term supply disruption news etc, but always falling back. Now there is an underlying recognition growing in the markets of 'systematic bias' as Gail wrote about yesterday, and that cheap oil is the commodity that largely is responsible for this bias. Once this is recognized, and it clearly already has been, geopolitics changes the situation from one of simply quantifying oil resevoir capacity, to something much more complex.
I expect oil prices will go down again, especially if the credit crisis unfolds for the worse, but where they stop will be a 'higher low' in what will be a long term moon shot for this precious resource. (that is until the 15% or so that is not nationalized, will be)
Venezuela's "capacity" to the rescue:
Things just get stranger and stranger with Venezuela. First they do their best to keep other OPEC countries from producing more, then they boast about a production increase when they are apparently 760,000 mbpd off their stated production figures! Is it possible that amount of oil just fell off the shipping lists?
The price of oil isn't necessarily going to go down with the unfolding of the credit crisis if the Plunge Prevention Team succeeds in injecting enough "liquidity" to inflate out of the crisis. Seems pretty hard to me to predict anything, given that as usual, we can only guess at what cards the really powerful players actually have
Then the dollar tanks on forex and global wage arbitration prevents any real increases in wages.
You can't have traditional inflation without wage increases. Sorry no way out of this one.
Also I don't quite understand why people think that the TPTB are going to suddenly take the side of Joe6pack and try and bolster the middle class that have worked 100 years to destroy.
Not to be cruel but the next big boom would be the flow of manufacturing back to the US once salaries take a dive to Chinese levels. This is of course assuming we have enough oil etc to boom.
Most of the money not going to the wealthy would be spent for resources with very little going out as salaries. And of course the focus would be on high priced basic necessities not consumer goods.
Wage arbitrage will continue to force prices down as we can now compete with China. As far as who the actual consumer is well its the line manager and above not the workers so your looking at a 10-100:1 reduction on the size of the consumer pool.
And not surprisingly this is the level of economic activity that could be supported with our dwindling oil supplies. Also look for recycling to become huge under these conditions with cheap labor.
I assure their is a lot more blood to squeeze out of the turnip just I don't think it will happen the way your saying the powerful are not done yet with raping the masses.
Don't forget that shipping costs will also favor localized production. There's also the question of experience; a friend of mine who did contract work for NASA told me that as of the mid-1990s (20 years later) we already forgot the technology used to get us to the Moon. So will we remember all the tricks that we need to manufacture paper clips, or will we need to relearn in addition to learning how to do with less energy?
A rather simple observation in this respect. I have two potato/carrot peelers. One is new (made in China), one is old (made in US). The new one is crap.
Ah, The vitamins are in the peel. I never peel. Maybe it is all for the best.... ;-)
prairiedog -
Ain't that the truth!
My late mother complained that her toaster was junk when it finally gave up the ghost after well over 25 years of hard service. In that same time span I've probably gone through at least four toasters, each one progressively crappier than the last one. Ditto for refrigerators and washing machines.
When I was in high school and college, on weekends I'd sometimes work with my uncle, who was a plumber. We'd often remove pipes from old houses, and I can tell you that it was not uncommon to encounter an original 80-year-old brass sink trap that was heavy enough to run your car over it without deforming it. Today, a sink trap is a chrome-plated piece of paper-thin metal that you can almost crush in your hand like a beer can. They usually last about 6 to 8 years or so in my house before they corrode through.
The problem is that we've gotten conditioned to this sort of impermanence and shodiness and have unconsciously grown to accept it. It's a good reminder that there was a time when you bought an appliance or tool and had the expectation that it would last a real long time.
Of course, back then appliances were more expensive in terms of inflation-adjusted dollars, so I guess there is some compensation. Still, I think it's a trend in the wrong direction.
I've probably gone through at least four toasters, each one progressively crappier than the last one. Ditto for refrigerators and washing machines.
Now I can't help ya much on toast, as I make mine on the gas stove. Nor can I help much on the stove (but Sunfrost is a common brand on the energy conservation circuit.)
But I *CAN* help on the washing machine question.
http://www.staber.com/
You can run 'em off a bicycle frame - for that "I'm a doomer but I'm CLEAN!" look
Here's a tip for anyone w/ a sunfrost. If you add latches (like the kind on ski boots) it will work much better because the seals aren't great. Maybe it would help with normal friges too. I got the idea from the old ones that closed w/ that kind of mechanism.
It's called "planned obsolesance" (?spelling?). In order to keep the economy going things are designed for a limited service life so that customers need to come back for more.
People think I'm overly pessimistic as to the aftermath of peak oil; but 20 years after the factories shut down due to insufficient energy all our water heaters, kitchen appliances, outdoor plastic pails, and other everyday items will no longer be of use. We'll be closer to Stone Age technology than most people will be prepared to deal with.
These thoughts used to cause me feelings of anxiety. Now, it's all become a weird perverted hilarious comedy. I just have to laugh... heck, might as well get some enjoyment out of it.
joule - Right there with ya. About 10 years ago I declared a moratorium on buying cheap Chinese kitchen utensils and never looked back! Give me heavy gauge stainless steel, or nothin'! (Which has turned out to be a good thing in terms of post-peak preparation as well.)
So now I regularly go off on LONG hunts for things that are well made. And in terms of toasters, I found it: the Dualit! They're hand made in Britain with stainless steel components, and made for commercial duty. Should last you a lifetime, and if one ever needs repairing:
Plus it has a number of smart design advantages. Check it out! They're quite expensive at new retail prices (over $300), as anything good is, but you can find sort-of reasonably priced ones (with a few distress marks, or refurbished) on eBay.
You can't have traditional inflation without wage increases, but you can still have a big increase in commodity prices (which is a different thing from traditional inflation).
Oil is not a luxury like furs or fancy cars. It's a wealth-producing asset, even for low-income people. Remember all the TOD articles on how much human labor energy a barrel of oil represents. People will use oil more efficiently, but they will continue to use it, because wise use of it generates wealth.
Also, Bernanke is playing it tight, but not that tight. Didn't you catch his speech today? Bernanke understands, correctly, that he has to keep inflation coming to keep capital in the game.
I don't disagree and thats why I think problems will be bad.
Most people think of this price inflation as a issue for consumers but the bigger issue is it puts a squeeze on manufactures retailers etc etc. This will force them to lower wages to compete.
So the consumer gets squeezed on both sides falling wages and rising prices driven by expensive commodities. This commodity price pressure on business virtually assures that wage increase are not going to happen. Now of course this feeds back to the producer as the consumer ( his employees ) lose purchasing power he will be forced to lower prices to try and retain business. A lot of our business's today have low margin and high volume requirements. In a sense we are hedged to the hilt on large scale manufacturing. Whole swaths of business become unprofitable below certain volume levels. Generally the easiest way to deal with this is to close factories and aggressively downsize the business. Thus demand destruction is simply the name for Depression driven by resource depletion.
Also note that this process makes it painfully clear they we have never had a true fiat currency the real currency of the world has always been oil. Central banks can change the peg of a monetary unit to a barrel of oil but what really happened as we left the gold standard was we moved to a oil standard.
I think this is why a lot of people try to prove that the dollar and other currencies are not tied directly to oil and resulting industrial production because as with gold the owners of the gold mines rule the world. And this is why its impossible to inflate our currencies we can't since we don't own the real money that drives the world.
If indeed globalization is steadily driving us towards a 'perfect market' regarding labor, then the logical extension is that eventually there will develop a universal global wage scale. Thus, if you're a working person, it won't matter whether you're in Gary, Indiana or Bangledesh, you will have the same wage status and won't have much say in the matter. And once that condition is in place, we will then have a truely global proletariat .... with all the sinister connotations that very loaded word evokes.
It's not going to happen, because something big and unpleasant will happen first. Where, when, and who ... I don't know, but something is going to give way before we reach that point. I think this is a major blind spot in the thinking of the powers that be.
Well you needs a universal currency also for this to happen. Central Banks can and will manipulate their currencies vs other currencies. This has the effect of keeping wages or better buying power in certain countries low.
This is why inflows of petrodollars ( Not US dollars ) are vital to china and for that matter the worst offender Japan and even worse OPEC. The breaking of the peg of oil to the dollar recently is probably the biggest shift on the planet since it will eventually blow up all dollar pegs include the peg of the US dollar to the petrodollar.
As long as the US had wealth to drain from the middle class this game worked. Now that the US middle class has finally run out of money and has been shown to not have the military might it claimed a new game is afoot.
I do think that if it can be done globalization will continue but now I think the goal is to break the control of governments over money so that the global companies can control wages not governments. Thus real wage arbitrage with money accumulating with the global companies not Central Banks. They want to take the trillions of dollars that have accumulated in China, Japan in the ME from the robbing of the worker/consumer.
With oil now scarce the current fiat currencies are not needed and oil itself like gold in the past can be used directly and wealth.
I don't think that peak oil really changes the game a lot except to unmask it and make it more ruthless since the rich are now eating a slowly shrinking pie.
Think about it anyone who can do simple math can figure out that China and India would never be able to create a western style living standard for a two billion people. This was always going to fail way to many resources are depleting. So I don't think the real game has changed with peak oil all thats happened is we have named one of the critical declining resources for the second half of the great globalization game. We all knew in our hearts it would end this way.
Memmel, I cannot thank you enough. In some of the comments in some other key posts, everybody’s been so horrible about inflation. It’s this, it’s that, it’s not this or that, and here, at last, we know what it is. Memmel, how do you do it? Damn, I think I got ahead of myself here. Sorry Memmel. What I meant to say was at last we know there’s traditional inflation and all those other, evil and nasty probably, kinds of inflation. That’s okay Memmel, nobody else has even gotten us this close. I know you can point the way. I know you can bring light to the darkness. I just know it.
Memmel, I know with such surety it’s rude to ask without offering to pay, but there we are, just how do I know traditional inflation from all the other nasty and brutish kinds? Not to mention all the impostors and impersonators and, well, you get the picture? I mean, I could just wake up one sunny Sunday, pop down to the newsagents to pick up the Times on Sunday and The Observer (what can I say, I’m a tortured soul) and, bam, be confronted with at least two versions of inflation. Talking about the very same subject! How do I recognise traditional inflation? What if some non-traditional inflation is masquerading as traditional inflation (just to get in my good books or maybe, even, to deceive me!), how do I recognise it for what it is and banish it to deflation (or wherever non-traditional inflation should be banished to)?
I know I shouldn’t ask, but I’m at a loss. And there’s nobody else, well, maybe a good few actually, that can waffle as long about something in a single comment, let alone a thread, as you can. So I know if I ask you that after some arbitrarily high number of comments at some point you may actually say something that will help me to really, and I mean really, identify what “traditional” inflation is. That way, when I see it, I’ll be able to say to it, get thee to the deflation (or hell, or wherever). Or something like that. Can inflation be made to spin its head round on its shoulders and puke green all over the local padre?
Please help me. I feel like that poor witch that was so brutally treated at Dorothy’s hands with that bucket full of traditional inflation (I know, it was water, but with Hollywood’s writers out on strike I’m stuck doing Leno’s DIY material) and just find myself melting, melting, melting.
Sorry to be “doing a Memmel” as it were, but sometimes waffle’s are just better than pancakes.
So, to bring this bollocks to an end, what is “traditional” inflation. Is it different from “inflation.” Does this imply there are forms of non-traditional inflation. If so, what does non-traditional inflation look like and what does it imply. Does this mean there are an infinite number of forms of non-traditional inflation? Does this mean, on balance, non-traditional inflation is more likely to appear than traditional inflation? Are some forms of non-traditional inflation more likely to lead to traditional inflation than others? Can traditional inflation metastasise into non-traditional inflation? If so, what are the precursors? Thanks in advance for your kind consideration.
I know you're being a bit of a troll and that I should let memmel respond or not as he will, but here goes:
Traditional inflation (that is inflation as traditionally defined) is an increase in the supply of money relative to a standard measure. In a gold backed currency that would be an increase in the supply of money relative to the owned quantity of gold. In a fiat currency it is something like an increase in the supply of money relative to the GDP. This increase in the money supply can (and should) cause prices to rise, but the price rise is a result of inflation. Not all price increases are a result of inflation.
This is at odds with inflation as commonly reported which considers any price increase to be inflation (or an indication of inflation).
If the price of oil goes up for fundamental market reasons (lack of supply, increase in demand, etc.) then that is not traditional inflation. If the price of oil goes up because the Federal Reserve is issuing 0% short-term loans that is inflation.
Our current reporting of inflation numbers based on the cost of a basket of goods works acceptable most of the time but falls apart drastically if there is a fundamental change in the market such as that which would be caused by resource depletion.
--
JimFive
Troll or no, the notion that “traditional” inflation requires rising wages demands clarification.
For the record, at least you have provided a reasonable definition of inflation with which to work. Thanks for that.
There's only one thing missing, the assertion that "traditional" inflation requires rising wages. Are rising wages an essential component of “traditional” inflation? In essence, are they a traditional component of “traditional” inflation?
Poss