Like the illusion of Wall Street, with its vast and powerful investment banks, now shuttered, China too is an illusion perpetuated by the Globalists that gave us the 15,000 mile Caesar salad, poisoned cat food and lead based paint on babies' pacifiers. Like the illusion that money would come from thin air to always push housing prices higher, China has spent a generation pursuing its illusion. Pursuing an unattainable dream to be like the West, while 6000 years of its carefully shepherded top soil blows into the sea.
Joined: Feb 20, 2005 Posts: 2888 Location: Uppsala, Sweden
Posted: Fri Jan 20, 2006 8:13 pm Post subject: Interest rates and investments after peak oil
Okay, I just had this little question.
Peak oil hits, either as a peak or as a nasty volatile plateau. It hurts the economy. When the economy slows you lower interest rates. This should mean that loaning money become cheap, and the cheap loans can be used to invest in power plants, public tranportation and efficiency, right?
Sure, tax income will fall and company sales too, meaning less money for investments, but if oil becomes really expensive other things will become comparatively cheap and hence profitable investing in. _________________ Peak oil is not an energy crisis. It is a liquid fuel crisis.
Posted: Fri Jan 20, 2006 9:40 pm Post subject: Re: Interest rates and investments after peak oil
Interest rates are composed of multiple elements.
One is the inflation premium. If it cost me $30,000 to buy a car today and will cost me $40,000 in two years because of the depreciation of the value of currency by government running of the printing press, then I am going to want to be added to the interest rate I charge you this $10,000 loss in purchasing power of my money in order to loan it to you.
Another factor is the supply of loanable funds and the demand. Historically, the amount of excess capital contributed to the supply of loanable funds. Tapping energy resources like coal, oil and natural gas contributed significantly to the wealth (excess capital) available so it follows that as peak oil hits, afterwards there will be less excess capital, hence less supply available to be loaned.
The financial debacle associated with the collapse of industrial society should additionally add to risk in all human arrangements including loans, hence lenders will want to compensate for this increased risk by a higher rate of interest.
I think that government will print to attempt to save itself; I think that wealth will cease to be increased (lack of energy) and in fact will be consumed rapidly in the desperation to survive; and I think that risk will be high compared to normal periods of history. All in all, there should be significant upward pressure on interest rates post peak.
Joined: Oct 16, 2005 Posts: 233 Location: Australia
Posted: Fri Jan 20, 2006 10:35 pm Post subject: Re: Interest rates and investments after peak oil
Starvid wrote:
.....
Sure, tax income will fall and company sales too, meaning less money for investments, but if oil becomes really expensive other things will become comparatively cheap and hence profitable investing in...
I think you've got a bit of "can't see the forest for the trees" going on here. Fuel prices are presently a key input into almost all 'other things' that a salable. This means that prices will rise across the board and the availability of goods will simply diminish as it becomes too expensive to do business. There may be some initial cycles of cheap goods as people try to offload overstocked items that no one can afford but it would often be a signal of a business making a desperate attempt to liquidate and manage poor cash flow problems before becoming insolvent. Long term past peak, the only things that will be worth investing in are the staple must haves for human survival - that which supports or directly contributes to energy, food, freash water and shelter.
Joined: May 22, 2004 Posts: 1438 Location: Ottawa, Ontario
Posted: Sat Jan 21, 2006 12:19 am Post subject: Re: Interest rates and investments after peak oil
Quote:
Okay, I just had this little question.
Peak oil hits, either as a peak or as a nasty volatile plateau. It hurts the economy. When the economy slows you lower interest rates. This should mean that loaning money become cheap, and the cheap loans can be used to invest in power plants, public tranportation and efficiency, right?
Sure, tax income will fall and company sales too, meaning less money for investments, but if oil becomes really expensive other things will become comparatively cheap and hence profitable investing in.
I'm with you all the way until you say that you want to invest in things that are relatively cheap and getting relatively cheaper. That's buying low and selling lower. Not a sound investment strategy.
The investment paradigm that will be required in a permanently contracting world is not what investment will give me the greatest return on my capital but what investment will best conserve my capital. If you are able to get a rate of return close to the rate of inflation you'll be laughing. _________________ Biofuels: The "What else we got to burn?" answer to peak oil.
Joined: May 22, 2004 Posts: 1438 Location: Ottawa, Ontario
Posted: Sat Jan 21, 2006 12:45 am Post subject: Re: Interest rates and investments after peak oil
Quote:
Nero, Got gold?
I'm no fan of gold. In a contracting economy the value of gold should decrease like everything else. If we were on a gold standard the fact that the money supply could not decrease in step with the economy would itself be an inflationary situation. _________________ Biofuels: The "What else we got to burn?" answer to peak oil.
Posted: Sat Jan 21, 2006 1:14 am Post subject: Re: Interest rates and investments after peak oil
What if the fed has to create another asset bubble to absorb the ton of liquidity they want to inject into the economy? People aren't going to borrow money to buy stocks or real estate anymore. But precious metals? Talk about taking a circuitous route to a gold backed fiat.
Joined: May 22, 2004 Posts: 1438 Location: Ottawa, Ontario
Posted: Sat Jan 21, 2006 8:10 am Post subject: Re: Interest rates and investments after peak oil
Quote:
I'd demur on the remark above about gold.
Gold is gold, no one can print it, it's like oil, it's a tangible, physical, valuable thing.
Gold's primary use is a store of value it is not consumed so it is more like paper money than oil in that way. But it doesn't change anything if you view it as a commodity. In a declining economy less and less of certain items like oil will be produced each year. These items are consumables unlike gold so when less is produced there is less available to buy. The stock of gold however available to buy does not decline but increases slowly. There is an increase in supply of gold a decrease in supply of oil. All thing being equal you would therefore expect oil (and all consumables) to increase in value more than gold. _________________ Biofuels: The "What else we got to burn?" answer to peak oil.
Posted: Sat Jan 21, 2006 6:28 pm Post subject: Re: Interest rates and investments after peak oil
nero wrote:
Quote:
I'd demur on the remark above about gold.
Gold is gold, no one can print it, it's like oil, it's a tangible, physical, valuable thing.
Gold's primary use is a store of value it is not consumed so it is more like paper money than oil in that way. But it doesn't change anything if you view it as a commodity. In a declining economy less and less of certain items like oil will be produced each year. These items are consumables unlike gold so when less is produced there is less available to buy. The stock of gold however available to buy does not decline but increases slowly. There is an increase in supply of gold a decrease in supply of oil. All thing being equal you would therefore expect oil (and all consumables) to increase in value more than gold.
Nero, You are, of course, counting on the fact that declining demand outpaces the declining value of the dollar. This could happen. Demand destruction could easily cut consumption by 50%, but I see forces that will weaken the dollar by a greater percentage, so higher unemployment, declining demand and rising prices, except in the real estate sector.
In the financial sector the new game will be natural resources, particularly precious metals with gold being the most desired.
Synergist, I completely agree with you that you can't print gold, but you can print gold certificates and subcontract storage to a company that sub sub contracts it. And so on and so on. As long as there is confidence in the certificates that are based on questionable amounts of actual physical gold, it could almost represent a new kind of currency for the wealthy. All the theiving, conniving, lying, hyping, and smoke and mirrors surrounding this new way of financializing the economy will provide badly needed employment.
A mountain of gold (even if it's really papier mache with a gold leaf finish) will be a handy place for Ben Bernanke to dump his choppers full of currency. As long as all the purchasers of certificates don't get wise at the same time, the scheme has legs.
Joined: May 22, 2004 Posts: 1438 Location: Ottawa, Ontario
Posted: Tue Jan 24, 2006 10:43 am Post subject: Re: Interest rates and investments after peak oil
threadbear wrote:
Nero, You are, of course, counting on the fact that declining demand outpaces the declining value of the dollar. This could happen. Demand destruction could easily cut consumption by 50%, but I see forces that will weaken the dollar by a greater percentage, so higher unemployment, declining demand and rising prices, except in the real estate sector.
No I wasn't counting on inflation to be less than the drop in consumption. The point is that when you have an oil shock some of what is seen as inflation isn't actually caused by them printing too many dollars but is because it is genuinely more expensive to produce things because oil is more expensive. Gold since its value is primarily set by its scarcity will not be affected. The value of gold in dollar terms does not increase because it is more expensive to mine the yellow stuff. Gold as a hedge against inflation doesn't work when the supposed inflation is really just the increasing cost of production.
In a situation where things are getting more difficult to produce and therefore we are producing less and less a wise central banker might decrease the money supply to maintain price stability while we produce less. In the gold market this would translate into fewer dollars chasing the same amount of gold and lead to a drop in gold prices while the price for other products remains stable.
It doesn't matter what the central banker does to the money supply in the end the relative scarcity of the two items (eg. oil and gold) determines their relative value. _________________ Biofuels: The "What else we got to burn?" answer to peak oil.
Posted: Tue Jan 24, 2006 12:34 pm Post subject: Re: Interest rates and investments after peak oil
nero wrote:
Quote:
Nero, Got gold?
I'm no fan of gold. In a contracting economy the value of gold should decrease like everything else. If we were on a gold standard the fact that the money supply could not decrease in step with the economy would itself be an inflationary situation.
Even with a specie currency the money supply is not set by the underlying asset. The effect of fractional banking is to create supply as needed.
Today's currencies are fiat so the value of gold is only determined by the faith in those currencies.
Labor is what sets the value of our currency. China's labor runs some $5/day and because of their growth, excess capacity has only strengthened their labor deflation. That is why inflation appears benign today.
The 'proof' of the value of gold is in the pudding. Its value has far outpaced overall inflation. The rampant growth in China has created a new demand for gold. The same applies to India. Some part of two billion people acquiring what they consider valuable.
Posted: Tue Jan 24, 2006 3:30 pm Post subject: Re: Interest rates and investments after peak oil
nero wrote:
threadbear wrote:
Nero, You are, of course, counting on the fact that declining demand outpaces the declining value of the dollar. This could happen. Demand destruction could easily cut consumption by 50%, but I see forces that will weaken the dollar by a greater percentage, so higher unemployment, declining demand and rising prices, except in the real estate sector.
No I wasn't counting on inflation to be less than the drop in consumption. The point is that when you have an oil shock some of what is seen as inflation isn't actually caused by them printing too many dollars but is because it is genuinely more expensive to produce things because oil is more expensive. Gold since its value is primarily set by its scarcity will not be affected. The value of gold in dollar terms does not increase because it is more expensive to mine the yellow stuff. Gold as a hedge against inflation doesn't work when the supposed inflation is really just the increasing cost of production.
In a situation where things are getting more difficult to produce and therefore we are producing less and less a wise central banker might decrease the money supply to maintain price stability while we produce less. In the gold market this would translate into fewer dollars chasing the same amount of gold and lead to a drop in gold prices while the price for other products remains stable.
It doesn't matter what the central banker does to the money supply in the end the relative scarcity of the two items (eg. oil and gold) determines their relative value.
Here's a general economic question. When you have stagflation you have fewer dollars floating around and prices going up. This is what we're headed for, and I would say standard economic theory gets turned a bit upside down here. The market simply reorganizes itself, one way or the other and caters to people in the upper 10% or 20% who have wealth. It's a form of rationing that we may have to live with forever, because of the scarcity of energy and natural resources of all kinds.
Joined: May 22, 2004 Posts: 1438 Location: Ottawa, Ontario
Posted: Tue Jan 24, 2006 3:49 pm Post subject: Re: Interest rates and investments after peak oil
Quote:
Here's a general economic question. When you have stagflation you have fewer dollars floating around and prices going up. This is what we're headed for, and I would say standard economic theory gets turned a bit upside down here. The market simply reorganizes itself, one way or the other and caters to people in the upper 10% or 20% who have wealth. It's a form of rationing that we may have to live with forever, because of the scarcity of energy and natural resources of all kinds.
Is this a question?
I think you miscaracterize stagflation. The stagflation of the 1970 had a large increase in the money supply. It started with an oil shock but the oil shock was relatively brief, it helped establish the inflationary expectation but the inflation continued because the central banks were not willing to turn off the taps. _________________ Biofuels: The "What else we got to burn?" answer to peak oil.
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