[neo]

I have been seeing two different perspectives after PO, and both are pretty convincing. One is that we'll see deflation, because of the demand destruction. When people are losing their jobs and the read estate and stock market bubble burst, people won't have any money to buy anything, so we will see price decreasing and deflation. The other is that since almost everything is related to oil in some way, the skyrocketing oil price will be factored in everything and we'll see price rising, plus the loose monetory policy has created too much paper wealth, so there will be a superinflation.

I'm really confused. Can those two factors cancel each other out and we'll see neither inflation or deflation?

[seldom_seen]

My understanding of the issue is that we will experience "stagflation." High inflation combined with a stagnant or even contracting economy.

This is what happened during the OPEC emgargo of the 70s.

$this->bbcode_second_pass_quote('', '[')b]Stagflation on the way Over the past year, growth in the US has continued to be robust, unemployment has fallen and the economy’s resource use has risen – meanwhile, inflation has increased substantially. Rising inflation has been due to external pressures from swelling commodity prices and a weaker dollar, but it is also a sign of more internal pricing power and pressure from the labour market in the form of rising option and bonus payouts. Oil prices, however, have shaved the top off growth and remain a threat. With the price of oil hovering around USD 60/barrel, more mixed growth signals, a flagging global industrial sector and a fed funds rate that, when all is said and done, has been hiked by 225bp, the going is beginning to get tougher – but only for growth. The relationship between growth and inflation is not simple. And developments in the two numbers are not coincident. Rising growth alongside falling inflation is perfectly possible. This was what the USA experienced from 2002 to 2004. On the other hand, does lower growth necessarily mean lower inflation? With the greatest oil price shock since the 1970s the question is rather if rising inflation – despite lower growth – is on the way. This is a scenario we have been toying with since mid-2003 (when we released a series of papers under the common title “Hour of denial” that argued that the Federal Reserve was about to make a monetary policy mistake by tightening too little and too late). This is beginning to look ever more likely. We still see US core inflation at around 3% y/y at the start of 2006 and we still expect solid growth this year of 3.6%, driven by consumption and the housing market. But even with lower growth, inflation will continue to rise – especially if the price of oil is the driver of the slowdown. In this situation, the FOMC will have to choose sides: Support growth or fight inflation? We believe they will lean to the latter. So expect many more rate hikes than the market is currently pricing in.

http://futures.fxstreet.com/futures/con ... dor=110430

[RonMN]

My take on it is no...they wont cancle eachother out.

you can't produce a product at a high price (because of high oil prices). and then ship it to market at a high price...and then sell it for a low price. IMHO the stores will sell what they have at a low price & then be empty. There will simply be almost nothing to buy any more. Deflation will only live until the stores are empty, and in this world of "just on time delivery" that wont take long.

[RiverRat]

Here is a good take on the present situation:

end game: hyperinflation

The basic premise is: the easy way out is to inflate everything away

In the short term, it would be political suicide to let deflation take affect; therefore the lesser of two evils would be to let inflation rise over the course of 'x' amount of time. This has been the predominate solution throughout history.

Another article I read (which I can't seem to locate) basically says the same thing but alludes to 'deflation' AFTER the run up of 'hyperinflation'.

ouch !

Then again ... no one has a crystal ball

[MonteQuest]

$this->bbcode_second_pass_quote('neo', 'I') have been seeing two different perspectives after PO, and both are pretty convincing. One is that we'll see deflation, because of the demand destruction. When people are losing their jobs and the read estate and stock market bubble burst, people won't have any money to buy anything, so we will see price decreasing and deflation. The other is that since almost everything is related to oil in some way, the skyrocketing oil price will be factored in everything and we'll see price rising, plus the loose monetory policy has created too much paper wealth, so there will be a superinflation.

I'm really confused. Can those two factors cancel each other out and we'll see neither inflation or deflation?

[halfin]

Don't forget the impact of the Federal Reserve Bank. The Fed has the power to control the growth of the money supply. If we start to fall into deflation they can loosen the purse strings and encourage the creation of new money. So the net result of a big increase in oil prices depends to a considerable extent on what the Fed decides to do.

But if we ignore that for a moment, and assume that the money supply stays the same, here is what economics predicts. You have a fixed supply of money which means that the average cost of goods will be constant. So how does the increase in oil cost play out? Well, some goods are more affected by oil prices than others. Imagine an "average" good in terms of how much it is affected by the cost of oil. Then we also will have goods with a higher than average impact from oil, and goods with a lower than average impact. What we would predict is that the prices of the higher-impact goods will rise and the prices of the lower-impact goods will fall, while the prices of the goods with an average impact from oil costs will remain the same.

As I said this is an over-simplified analysis because it ignores the Fed and it also ignores internal factors that can change the effective money supply (for example, in times of troubles people want to save more to have a cushion against hardship, which reduces the money supply). But if the combination of the Fed's actions and internal effects balances the money supply, which is roughly what the Fed tries to achieve, then this is what we should see with prices.

It's paradoxical that an increase in the price of a fundamental commodity like oil can actually lead to a reduction in price of some goods, but hopefully the analysis above will explain how it can happen.

[nero]

$this->bbcode_second_pass_quote('neo', 'I') have been seeing two different perspectives after PO, and both are pretty convincing. One is that we'll see deflation, because of the demand destruction. When people are losing their jobs and the read estate and stock market bubble burst, people won't have any money to buy anything, so we will see price decreasing and deflation. The other is that since almost everything is related to oil in some way, the skyrocketing oil price will be factored in everything and we'll see price rising, plus the loose monetory policy has created too much paper wealth, so there will be a superinflation.

[hull3551]

I do not believe we will see hyperinflation – not in the current state of political affairs. Hyperinflation predominantly occurs (imo) in weaker or eve loving political structures where a fledgling banking system is employed. I believe the US has too many checks and balances in the current system to enable hyperinflation.

However, 20+ years out I envision there will be some type of political change (revolution?) as resources diminish, capital/wealth is concentrated in the hands of a few, increased poverty, oppression through increased government control via crony capitalism, etc. All this is happening right now, it’s only a matter of time before some political change occurs from within, or an increasingly oppressive country such as China.

For the foreseeable future, I see stagflation. As we are all aware, through PO we will see a gradual increase in oil-based goods and services (which is basically everything).

[Rochester]

The primary reason that it is so confusing is because their are so many possible outcomes that will be determined by factors that have yet to fully kick in...

1) Reaction by the FED (could allow inflation to occur or it could kill inflation and cause a deep recesssion or depression)
2) How fast will prices run up (too fast and people can't react/change their behavior)
3) How fast do people change their behaviors
4) How quickly can new or existing technologies be put into place to relieve pricing pressures
5) How does the government respond (pricing freezes, rationing, etc...)


Depending on the mix of the above we could have hyper inflation, deflation, no change in inflation or some mix of all of them over a period of time.

I have 2 worst case scenarios...

Scenario 1 calls for a rapid decline in supply and a rapid increase in prices (hyperinflation). Hyperinflation eventually causes mass unemployment which eventually kills oil demand and deflation follows as depression sets in.

Scenario 2 calls for rapid decline in oil supplies and a rapid rise in oil prices, but an over active FED squeezes rates to hold the line on inflation and send the economy into recession and possible depression and prices remain unchanged or collapse into deflation.

In reality what I'm hoping/expecting is that we continue to see a slow up noticable rise in oil prices (at least early on) causing people to change their behaviors (or at least to consider it) so that as oil supplies do become limited we can make an orderly transition. In this scenario we'll see some moderate inflation wil lots of government activity to smooth or help a transition (nuclear subsites, mass transit build out, etc...).

[jaws]

There are two phenomenons commonly labelled as inflation/deflation. Remember that prices are just relative weighing of the value or scarcity of different goods. For example, 1 dollar/apple or 2 dollars/orange are fruit prices. These prices can also be interpreted as 2 apples/orange. Oranges are twice as scarce as apples.

If the government is rapidly creating money the scarcity of money will fall, therefore all prices quoted in dollars will increase, including wages, goods and investment capital. That is monetary or general inflation.

If the scarcity of a good increases, that creates inflation in the price of that good (and every dependent good in the production chain). For example oil becomes scarcer, the price of oil goes up, and the price of everything that has oil as an input goes up. That is what is called oil inflation. Similarly, the inverse of the price of oil compared to, example, wages, will experience deflation. That is to say, the value of wages expressed in oil will fall.

Where this gets really confusing then, is that during a peak oil crisis all of them are happening simultaneously. The scarcity of oil increases naturally, creating deflationary pressure on wages. To prevent an increase in unemployment, the government creates a lot of money very rapidly and keeps wages increasing in dollar terms, though that sends the price of oil skyrocketing. As the cycle of price shocks accelerates we ultimately enter hyperinflation and money loses all utility.

[RiverRat]

nope ... no inflation in june

This article reminds me of a slick PR release from a high flyin’ penny stock bio tech firm

I like this quote:
$this->bbcode_second_pass_quote('', '"')After buying their new vehicles from GM, happy consumers drove to the malls and spent all their savings," said Joel Naroff, chief economist at Naroff Economic Advisors, a consulting firm in Holland, Pa

[mark]

Inflation is the norm… always has been since the creation of the fed in 1913. When Nixon took us off the gold standard in 1971 he removed any link between hard asset money and fiat money. Therefore, inflation is the norm.

We will have inflation as long as the fed has control of the monetary levers.

If events occur that somehow limit the actions of the monetary authorities then there is a likelihood of deflation. Deflation, a sharp contraction of the money supply, will have the most damaging effect possible on a system where inflation rules. That’s because the actions which are rewarded under inflation (debt, expansion and more debt) are exactly those that deflation so devastatingly reverses.

So are you crazy for going into debt? Should you, as many here and elsewhere advise, get out of debt? Ultimately yes, as I see no way the monetary authorities can maintain control forever. But, with unlimited power (money) and a compliant population, they may do so far longer than any of us now believe.

Check out the NY TIMES article in which a white house source says ‘we create our own reality…’ Don’t have the link but it won’t be hard to find. Also, after reading the entire report you’ll understand what we’re up against. It’s given me a bad feeling.

[Whitecrab]

I just finished reading The Oil Factor by Stephen and Donna Leeb, an investing book centered around peak oil. Let me sum up their take:

-High oil prices are by nature inflationary
-During the last oil crisis, eventually, the US gov't decided to curb inflation by raising interest rates. That worked
-In this case, they can't do that because of the massive US debt. Raising rates too quickly could send the economy into a tail spin. The Fed will at most gingerly, slowly raise rates, backing off at any sign of trouble. Not enough to stop inflation
-Productivity gains have been historically overrated and likely can't reverse inflation in the years ahead
-In fact, because so much debt is leveraged directly to housing prices, the Fed may use negative real rates to keep housing prices up. Negative real rates mean that interest is so low, that you make money by buying real assets (like homes and gold) and holding onto them. Ex: you take a $100,000 loan and by a home. In 20 years you have to pay $110,000 back, but the home has become $130,000 by inflation alone! (**I was suprised the authors didn't consider that oil highs may make suburbia worthless...)
-So, inflation will probably be high, maybe even ridiculously high because the governemnt will use negative real rates in a desperate ploy to keep home prices from falling and ruining consumers
-HOWEVER, if oil prices rise very fast, that could criple the economy, which would cause deflation
-Therefore, for now start with an inflationary holdings (e.g. stocks that bet on gold/energy/defence) and hold a few deflation plays (bonds, zero coupon bond funds, etc.) as a back-up. If oil rises 80% in price over a year, switch almost entirely into deflation plays because the economy will probably tank. Wait until the year-over-year rise in oil prices drops to 20%, and then it's safe to go back into inflation mode
-Inflationary times are very unforgiving investment climates (for reasons I won't summarize - takes awhile), and will require skilled investing. Especially since the economy could go deflationary at any time

So that was the take of the only peak-oil-specific investing book I know of. Probably riotous inflation, with sharp deflationary periods when the economy tanks or the Fed mis-steps.

Of course, the Fed could raise rates too high, crash the housing market and tons of debt, and criple the economy. They could do that by accident, or (Machivelian/conspiracy version) intentionally bankrupt people to make everyone reduce their energy use, or become poor and therefore desparete slave labour

[MonteQuest]

$this->bbcode_second_pass_quote('Whitecrab', ' ')Of course, the Fed could raise rates too high, crash the housing market and tons of debt, and criple the economy. They could do that by accident, or (Machivelian/conspiracy version) intentionally bankrupt people to make everyone reduce their energy use, or become poor and therefore desparete slave labour

[MaterialExcess]

I don't really think the Fed has as much power as most people think it does. The US is much too dependent on foreigners buying bonds to inflate away its debt. I cannot see countries like China allowing the US to do this at their expense. If the Fed intentionally allows inflation to get out of control, countries like China will just stop buying US bonds. The Fed is backed into a corner where they will have to raise interest rates even if it's going to burst the housing bubble. That is unless someone can come up with another bubble.

[MonteQuest]

$this->bbcode_second_pass_quote('MaterialExcess', 'I') don't really think the Fed has as much power as most people think it does. The US is much too dependent on foreigners buying bonds to inflate away its debt. I cannot see countries like China allowing the US to do this at their expense. If the Fed intentionally allows inflation to get out of control, countries like China will just stop buying US bonds. The Fed is backed into a corner where they will have to raise interest rates even if it's going to burst the housing bubble. That is unless someone can come up with another bubble.

[MaterialExcess]

$this->bbcode_second_pass_quote('MonteQuest', '')$this->bbcode_second_pass_quote('MaterialExcess', 'I') don't really think the Fed has as much power as most people think it does. The US is much too dependent on foreigners buying bonds to inflate away its debt. I cannot see countries like China allowing the US to do this at their expense. If the Fed intentionally allows inflation to get out of control, countries like China will just stop buying US bonds. The Fed is backed into a corner where they will have to raise interest rates even if it's going to burst the housing bubble. That is unless someone can come up with another bubble.

[MonteQuest]

$this->bbcode_second_pass_quote('MaterialExcess', ' ')Regardless of what breaks or pops, the Fed needs to people to buy US bonds. Hyperinflation can only happen at the expense of bond holders. If the Fed allows hyperinflation, there will be no bond buyers. The US will not be able to finance its debt, and the US dollar will become worthless. The Fed will need to allow interest rates to go high enough to prevent out of control inflation. I'm not saying there won't be any inflation, but I'm not expecting hyper inflation. This will likely pop the housing bubble. It won't be pretty, but alternative of allowing the US dollar to become worthless would be the end of the US economy and world dominance.

[MicroHydro]

$this->bbcode_second_pass_quote('MonteQuest', 'T')he hyperinflation comes after the bubble pop and deflation. The FED will have to flood us with liquidity.

[MonteQuest]

$this->bbcode_second_pass_quote('MicroHydro', '')$this->bbcode_second_pass_quote('MonteQuest', 'T')he hyperinflation comes after the bubble pop and deflation. The FED will have to flood us with liquidity.