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30 comments on More "peak oil navel gazing..." (or, let's just publicly ignore the lessons of the last few months)

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Stoneleigh on December 5, 2005 - 8:01am Permalink | Subthread | Parent | Comments top
This sort of deflationary scenario is exactly what I would expect to happen. The US is very close to the collapse of the real estate bubble and the implosion of an unprecedented debt mountain (the real elephant in the room). The stock market is also setting itself up for a crash. US consumers will have far, far less spending power than they have now in the relatively near future. If demand falls off a cliff because consumers are broke, companies are going out of business and there are far fewer jobs to drive to, energy prices would fall in the short term. Energy may not be any more affordable for ordinary people though, as prices may fall less quickly than their purchasing power.

If the US dollar plummets, as the great conveyor belt carrying wealth to the US from Asia (primarily) breaks down, oil (and LNG) producers are likely to choose to sell their product in euros. That would signal the beginning of serious price increases for US consumers. An apparent surplus as a consequence of sharply reduced demand freeing up some spare capacity would be unlikely to last for that long, given how close we are now to peak production. Once oil prices (denominated in euros) started to increase again, American consumers paying for oil with dollars falling in value at the same time would really be caught between a rock and a hard place. I suspect the US would decide not to take it lying down and would embark on another foolish military adventure, thereby making everything worse.

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Halfin on December 5, 2005 - 1:38pm Permalink | Subthread | Parent | Comments top
You certainly don't want to own gold in a deflation scenario. The gold bugs don't want you to know that, but it's true.

In deflation, cash is king. You want to hold the safest, interest-bearing cash investments. That means insured bank accounts and U.S. government bonds. Yes, the U.S. government is a safe investment. Any scenario where that comes into question is one where slavering mutant hordes are coming to eat your brains, so you'll have worse things to worry about than a bank or bond default.

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Joao Carlos on December 5, 2005 - 2:20pm Permalink | Subthread | Parent | Comments top
Halfin wrote:
"Yes, the U.S. government is a safe investment. Any scenario where that comes into question is one where slavering mutant hordes are coming to eat your brains, so you'll have worse things to worry about than a bank or bond default."

US treasure bonds will be not a safe investment if China drop all its US Treasure bonds and if the countires that have petrodollars don't have power to buy these US TB. By the way, next year we problably will see an inverted yeld curve for the US Treasure Bonds, be warned that it is not a good thing.

The thing is that we will not see dollar deflation. The federal governemnt will continue to have a huge deficit while there are the tax cuts, so if no one buy US Treasure Bonds they will need print money. The consequence is that we can have a recession with inflation, not the better of worlds. while that, GM and Ford aren't at good health now and who know how recession and inflation will affect other US big companies. That can be disastrous to US economy (think Katrina hiting US economy ...)

Hmmmmm.... "slavering mutant hordes" coming to eat our brains can be better than what we will see when the Dollar Crunsh come.

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Stoneleigh on December 5, 2005 - 2:58pm Permalink | Subthread | Parent | Comments top
I agree. Cash is king in a deflation and everything else should fall in value in relation to cash - gold included - for a while. Gold may fall to a lesser extent than other assets, but it should still fall. It should therefore be possible to buy gold more cheaply later if you ride out the deflationary impulse by staying liquid, IF you hold your liquid investment in a safe form.

I would say that short term treasuries should be safe for the forseeable future, but I certainly wouldn't bet on an insured bank account. IMO there's too high a risk of a run on the banking system during the kind of financial crisis I envisage, and insurance wouldn't be worth the paper it was written on under those circumstances. Remember what happened to bank accounts in Argentina during their financial meltdown?

The only reason I can think of for buying precious metals now would be as a hedge against that sort of collapse (in which case I'd choose silver, not gold), but that raises many other issues. What do you do with it? How do you trade it in if you need to at a later date (especially if you live in a rural area and are fuel constrained)? Would there be a confiscation order (as there was during the Great Depression)? If so that makes the first two questions even more pertinent.

Personally, I don't think there's much point for ordinary people (myself included) in owning precious metals. The money I could afford to spend has been sunk into a small farm with solar panels, generators and deep-cycle batteries instead (even though I expect the price of all those things to fall in the future - I had a learning curve to deal with and that takes time).

After all, you can't eat gold, and if you live on a farm you can't easily use it for anything you might need. I reckon providing for the necessities of your own existence at a practical level is a far better hedge against social upheaval caused by deflation than metals would be. As far as I'm concerned, a strategy of combining provision for the basic necessities with holding adequate liquidity makes the most sense.

Debt, by the way, is a no-no. Inflation eats away at savings and debts, but deflation increases both as the real rate of interest (the nominal rate minus a negative inflation rate) is potentially quite high even if the nominal rate is low. Today's low nominal interest rates are a trap.

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Donal on December 5, 2005 - 5:41pm Permalink | Subthread | Parent | Comments top
Personally, I've never understood why gold was so popular, but that fellow from Argentina (on that link to another PO site) said that when things got tough, gold jewelry was the best thing to offer merchants.  Cash was worthless and they couldn't or wouldn't verify gold bars or pieces, but they felt OK about cheaper gold.
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Glenn on December 5, 2005 - 10:43pm Permalink | Subthread | Parent | Comments top
I am really on the fence on the whole hyper-inflation vs. rapid deflation. Personally I think the US will not weather the storm as well as Europe, Canada, etc since they don't have the same trade/fiscal deficit. So how about this scenario: stagnant economic growth or slightly negative real growth, energy cost driven inflation, asset deflation (stocks, housing), high (15%) unemployment. Basically like the 1970s, but worse. I think gold is a good currency hedge in case the dollar plunges in value.
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