[Heineken]

It is very eye-raising that oil prices are plunging dramatically just in time for the election, after rising for the past two years. I don't usually believe in conspiracy notions, but this is flat-out obvious.

[threadbear]

$this->bbcode_second_pass_quote('Heineken', 'I')t is very eye-raising that oil prices are plunging dramatically just in time for the election, after rising for the past two years. I don't usually believe in conspiracy notions, but this is flat-out obvious.

[patience]

I guess OPEC got tired of falling oil prices? So, they cut 500,000 barrels of production. Gas here went up a dime a gallon the next day. Wait till we see what hurricane Ike, and his followers have to do with that. I don't see energy prices falling significantly at the consumer level from here on. The only down pressure I can see is demand destruction, and we see now what OPEC thinks of that. High priced energy = high priced everything, minus demand destruction. Yeah, way oversimplified, I know, but that's what I'm betting on presently.

Deflation, yes. What ever usually requires credit to buy-big ticket items-will probably drop due to lack of credit in the foreseeeable future. Commodities going down long term? Not so much, where demand is inelastic-food, energy, and the energy factor in goods of many sorts.

If I knew for certain what currencies are going to do in the coming year, I'd not have any worries about retirement, now would I?

I reserve the right to change my mind without notice.....

[shady28]

$this->bbcode_second_pass_quote('frankthetank', 'S')hady--snip--I want real world data...

[MrBill]

It is often misleading to compare the commodity price index with the consumer price index, or the producer price index to the consumer price index. They are certainly related to one another, but there are not only time lags, but also dampening effects.

For one thing if we look at just fuel, fertilizer and food we know that they are very closely related to one another as expensive fuel translates into higher fertilizer prices and higher cost of production for food. As food production is elastic that means over time food prices will rise in response to higher fuel and fertilizer prices. In the short-term though food production or supply is absolutely fixed.

However, on the other side of the equation is demand for food. Demand for food is somewhat more inelastic, but demand for one type of food over another is highly elastic. This flipside of demand is the ability to pay. Even if the cost of food production is rising due to high fuel and fertilizer prices if the end consumer cannot afford to buy certain types of food they will go unsold. Hence why cattle producers were suffering from high corn or feed prices. They could not pass along their increased costs fast enough.

Over time consumers will either eat less meat and/or they will allocate more of their discretionary spending to meat in their diet. If not, they will eat more substitutes. Hence why I suspect rice has risen the most this year of all commodities. Rice is a staple. If you cannot afford more meat or fish or fresh fruit and vegatables or dairy then you eat proportionately more rice. And in many traditional rice eating nations food makes up a much larger proportion of CPI than in wealthier countries. So they were hit disproportionately harder and sooner by higher global inflation that affected commodity prices.

There is no disconnect between falling asset prices and higher fuel, fertilizer and food prices due to scarcity. As a matter of fact that is what we should expect. As more of the household budget is allocated to staples like food and fuel, while high fuel and fertilizer prices make food more expensive, the less discretionary spending there is to invest in assets be they stocks, bonds or housing (over and above a simple roof over your head).

Dropping interest rates and adding liquidity late in the economic cycle after prices have gone sky high relative to incomes, and after excessive debt has been taken on relative to the ability to repay it in a low, slow, no growth economic environment is a vain attempt to stimulate demand for those high priced assets like stocks, bonds or housing where there is no ability to take on extra debt, and high consumer prices mean that more disposable income has to go towards meeting basic needs. It is like pushing on a string.

It is more inflationary, less deflationary, than say reducing money supply, but at the same time it is like using a thimble to bailout a sinking boat with a hole in its side. A $180 billion stimulous is a lot. A global slowdown with falling assets prices that wipes $1.8 trillion out is more. Especially in a fractional banking system where initial losses are compounded by their leverage factor. The $180 billion stimulous compared to $1.8 trillion x 10 is indeed a drop of water on a hot stone. A market's ability to deflate asset prices is larger than the government's ability to keep them inflated.

Not to be flippant, but if you showed up in Zimbabwe with a suitcase of US dollars you might be surprised at how many 'real assets' you could buy! ; - ))

[alpha480v]

We buy pretty much the same stuff every week and Food prices are on average 15% higher than last year. Maybe prices are deflating elsewhere in the US, BUT IT AIN'T HAPPENING HERE.

[MrBill]

$this->bbcode_second_pass_quote('alpha480v', 'W')e buy pretty much the same stuff every week and Food prices are on average 15% higher than last year. Maybe prices are deflating elsewhere in the US, BUT IT AIN'T HAPPENING HERE.

[BigTex]

Stocks are deflating.

[Heineken]

Really, Tex? I've been astonished at how well they've held up, given the calamitous events of the past year plus. Some excess fluff has boiled off, but basically the stock market remains intact, although admittedly it's not advancing at all.

Not nearly the drubbing I would have expected by now.

[cube]

$this->bbcode_second_pass_quote('MrBill', 'N')o, you're right, Heineken. Wealth is turning natural resources into value-added products that can be sold to someone else at a profit. No natural resources then no wealth creation. This is Mother Nature's limit to growth. However, I do think that N. America has more natural resources than, say, Chindia. What they have is labor. They still need to add value to that cheap labor by turning natural resources into something of value that they can then sell at a profit. There is a role here for Africa, Asia and S. America to play to provide those natural resources, of course, but they still have to overcome some of their own development problems such as BIC Syndrome that often means that high commodity prices are not necessarily turned into economic wealth. Or at least not broad based wealth.

[evilgenius]

Put it this way, if the whole banking system goes down over a weekend he who holds cash is king. Everybody else, unless you have a full pantry, will go hungry. Well, until the riots that is. That is why the dollar going up is a deflation signal.

Will it get that bad that quickly? Not likely, first there will be a few words from Paulson.

Just wait until it all sinks and the only person you have to look to for help is that Palin person. My oh my.

[shady28]

$this->bbcode_second_pass_quote('evilgenius', 'P')ut it this way, if the whole banking system goes down over a weekend he who holds cash is king. Everybody else, unless you have a full pantry, will go hungry. Well, until the riots that is. That is why the dollar going up is a deflation signal.

Will it get that bad that quickly? Not likely, first there will be a few words from Paulson.

Just wait until it all sinks and the only person you have to look to for help is that Palin person. My oh my.

[heroineworshipper]

An apparent lack of money to pay runaway asset prices is the trademark of hyperinflation. An apparent surplus of money to pay falling asset prices is the trademark of deflation. With fiat money, inflation always feels like a situation of not enough money.

In Japan in 1998, there seemed to be too much money for too little investments. Currently there seems to be not enough money to pay the $1.74 million for a house in Palo Alto, yet Palo Alto housing still goes up 4% a year.

[MrBill]

$this->bbcode_second_pass_quote('cube', 'p')robably off topic MrBill but I would like an opinion.

There seems to be this universal perception that Africa is resource rich.
But is that really true?
Maybe because Africa is so poor --> they consume less --> therefore they have so much more resources to export?

Perhaps in reality Africa is no more resource rich than Europe?
Am I onto something here or did someone spike my quadruple espresso drink with a hallucinogenic?

[Cid_Yama]

Easy money is the great cause of over-borrowing. When an investor thinks he can make over 100 per cent per annum by borrowing at 6 per cent, he will be tempted to borrow, and to invest or speculate with the borrowed money. This was a prime cause leading to the over-indebtedness of 1929. Inventions and technological improvements created wonderful investment opportunities, and so caused big debts.

The public psychology of going into debt for gain passes through several more or less distinct phases: (a) the lure of big prospective dividends or gains in income in the remote future; (b) the hope of selling at a profit, and realising a capital gain in the immediate future; (c) the vogue of reckless promotions, taking advantage of the habituation of the public to great expectations; (d) the development of downright fraud, imposing on a public which had grown credulous and gullible.

At some point, capital betrayed into unproductive works has to either be repaid or written off. If either is inhibited by reflation or regulatory forbearance, then a cost is imposed on productive works, whether through inflation, higher interest, diversion of consumption, or taxation to socialise losses. Over time that cost ultimately hollows out the real productive economy leaving only bubble assets standing.

Without a productive foundation, as reflation and forbearance reach their limits, those bubble assets must deflate.

Fisher’s debt deflation theory was little recognised in his lifetime, probably because he was right in drawing attention to the systemic failures that precipitated the crash. Speaking truth to power isn’t a ticket to popularity today either.
link

[patience]

The article gives a chart of debt as a % of GDP, showing about 250% in 1930's, vs 350% now. If I correctly understand that, we have a bigger problem now than at the outset of GD I. So, it will take longer to put things right again, all else being equal. But they are NOT equal, with Peak Everything looming. It says to me that we all get a lot poorer, since our cheap oil slave is going to be less available to pull the load.

[Delphis]

Thought anyone who has wondered about why there is still no deflation?

The Fed has a bag of tricks to stave of deflation and that bag includes but is not limited to making up the rules as they go along...

Why does that sound familiar?

http://www.itulip.com/Select/feddeflationplaybook.pdf

[mefistofeles]

Personally I believe that we can't have deflation because of the huge supply of dollars outstanding.

The Japanese didn't have deflation for two reasons.

1. They really wanted to control their economy and didn't let it become quite the international that the dollar is.

2. The Japanese are net savers and exporters and do not have to rely upon the largesse of others.

The opposite is true for the US. The US has encouraged foreign nations to hold dollars.

The US a net borrower, even more so now with the massive bailout.

What this means in my opinion is that there is a huge supply of dollars out there in the global economy. As long as people hold onto those dollars everything is fine. However once those dollars start coming home we have major problems.

The bailout scheme is another wonderful example. It doesn't matter how wonderful the bailout is it creates a huge new supply of dollars.

Since the United States can barely afford to service its debt payments that new debt will probably need to be rolled over. So in the future the United States must roll over its obligations in ever larger quantities.

I think this is unsustainable.

[DantesPeak]

Essentially the current Fed plan is to replace the $2 trillon or so in financial capital that went up in smoke with $2 trillion or so in new fiat money.

Basically they hope that the world won't notice that there are now $2 trillion more dollars around, but they want everyone to accept them at the same value as before. They use tricks such as 'dollar swaps" to create the illusion there is 'strong demand' for the dollar.

But when anyone accepts these new dollars at face value, they are transferring their real wealth to the US Fed & Treasury for just paper.

Why anyone, especially us here in the US, would be even remotely willing to see the dollar utterly debased, yet continue to act as if all these extra dollars are worth exactly the same as all those before is a mystery.

There is an appalling misunderstanding of what the Fed is doing, but I won't complain too much, because the more paper dollars that are exchanged for something of value, the better is life here in the US.

Deflation in the present circumstances is almost impossible.

[ColossalContrarian]

$this->bbcode_second_pass_quote('mefistofeles', 'P')ersonally I believe that we can't have deflation because of the huge supply of dollars outstanding....