Joined: Aug 23, 2004 Posts: 371 Location: New Zealand
Posted: Thu Jul 17, 2008 2:56 am Post subject: PO Value increases being mis-labeled "inflation"
If food or Oil are becoming more difficult to produce then their value is going up. If the price adjusts to match that value then that is not inflation.
Inflation is an increase in the money supply (which is happening hand over fist too.)
However people are being told not that prices are going up because of PO and that everything is becoming more valuable, but that inflation is causing it. Thus Peak Oil and its world crushing implications are being masked.
The message people are not hearing is:
"The Price of Oil is NOT inflating. It is getting HARDER TO COME BY. The Price of Food is not inflating, it is getting HARDER TO COME BY."
Posted: Thu Jul 17, 2008 3:20 am Post subject: Re: PO Value increases being mis-labeled "inflation&quo
idiom wrote:
If food or Oil are becoming more difficult to produce then their value is going up. If the price adjusts to match that value then that is not inflation.
Inflation is an increase in the money supply (which is happening hand over fist too.)
However people are being told not that prices are going up because of PO and that everything is becoming more valuable, but that inflation is causing it. Thus Peak Oil and its world crushing implications are being masked.
The message people are not hearing is:
"The Price of Oil is NOT inflating. It is getting HARDER TO COME BY. The Price of Food is not inflating, it is getting HARDER TO COME BY."
Half correct, and that is why the Fed measure "Core inflation" were food and energy is taken out.
Make no mistake though, the rise in cost for fuel and food could lead to “real inflation”, since people and companies search for compensation. Higher prices and higher salaries, which leads to even higher prices and even higher salaries and so on.
The commodity boom might set of a dangerous inflation and the Fed is to react to possible inflation expectations, and the risk for dangerous inflation has absolutely gone up. _________________ Me Tar sands, you Jane
Posted: Thu Jul 17, 2008 3:58 am Post subject: Re: PO Value increases being mis-labeled "inflation&
The problem is that not only food and oil will go up, but almost anything else too because of PO (steel, iron, plastic products, fertilizer... you name it!). The main thing that won't go up because of PO is salaries.
I agree that this could cause "money" inflation at the end, but I think it is very important to distinguish the two.
The fed and other governments are likely to increase interest rates because they think this is all "regular" money inflation.
So I wonder if increasing interest rate would help.
It would only help to stem "money" inflation, but it will have no impact on "PO inflation".
What will happen if they increase interest rates, and "PO inflation" keeps going up (and they think this is "money inflation")? Will they keep increasing interest rates, further hurting everyone?
Assuming for a moment that we are able to stop money inflation and only have "PO inflation", then nothing will help - in fact in my opinion they may have to reduce interest rates to basically 0 once the growth paradigm falls apart.... otherwise nobody will be able to afford loans anymore.
(As a side question: why in the world is food and energy taken out of the core inflation??? To me energy and food are the most important parts. Do they know that PO will lead to increasing food/energy costs and is that why it is taken out???)
Joined: Dec 07, 2005 Posts: 1741 Location: Australia
Posted: Thu Jul 17, 2008 4:13 am Post subject: Re: PO Value increases being mis-labeled "inflation&quo
Easing interest rates certainly wouldn't help.
If oil price (and cost of anything related) increases becasue of shortage, then increasing money supply can only make it worse as more money chases the same amount of goods.
No doubt some countries will decrease interest rates but that will be more of an attempt to keep people from rioting. _________________ Lets take a ride, and run with the dogs tonight
In suburbia
You cant hide, run with the dogs tonight
In suburbia
- Pet Shop Boys
Posted: Thu Jul 17, 2008 4:27 am Post subject: Re: PO Value increases being mis-labeled "inflation&quo
I'm thinking of all the people who have mortgages.
In a "PO inflation" scenario, everything (except salaries) gets more expensive, and people have less money available for everything, including paying the mortgage.
So given the same interest rates, more people will default and foreclose.
Increasing interest rates would make this even worse.
Only lowering interest rates would help in this case (as long as this doesn't increase the money supply... and cause "money inflation").
Joined: Aug 23, 2004 Posts: 371 Location: New Zealand
Posted: Thu Jul 17, 2008 5:04 am Post subject: Re: PO Value increases being mis-labeled "inflation&
What I mean is that people are not catching the idea that the Loaf of Bread today is NOT the same Loaf of bread as four years ago. It is harder to make it now than it was four years ago.
The CPI based on a basket of goods is not taking Peak Oil into account. The REAL value of the items in the CPI is going up. Its not meant to. The whole index is being thrown off by PO.
Posted: Thu Jul 17, 2008 5:53 am Post subject: Re: PO Value increases being mis-labeled "inflation&
chenopodium wrote:
I wonder if there is a better way to compute "money" inflation.
Something like total amount of a currency divided by the number of people...
Or maybe we should just look at salaries to compute inflation, as they won't increase because of PO
Any other ideas ?
Inflation in itself is not necessarily dangerous to the economy, only spiralling inflation is. That is why the Fed measure core inflation without the volatile commodities of food and energy.
This is a good article that explains it all: http://www.economist.com/finance/displaystory.cfm?story_id=11622353 _________________ Me Tar sands, you Jane
Joined: Dec 07, 2005 Posts: 1741 Location: Australia
Posted: Thu Jul 17, 2008 7:51 am Post subject: Re: PO Value increases being mis-labeled "inflation&quo
Quote:
Inflation in itself is not necessarily dangerous to the economy, only spiralling inflation is. That is why the Fed measure core inflation without the volatile commodities of food and energy.
This is a good article that explains it all: http://www.economist.com/finance/displaystory.cfm?story_id=11622353
And if that still comes out too high, they use substitution and then hedonic adjustments.
Call it what ever you want, measure how you want. The fact is, if you increase the amount of money, it will go into "things".
If you lower interst rates, your loan repayments go down, but everything else goes up. It is however preferable to home owners as it helps retain some value in the property and the increased living cost burden is shared also with people who don't have homeloans. (i.e. also people who don't get to benefit from lower interest will have to take share in the cost of such a move.) _________________ Lets take a ride, and run with the dogs tonight
In suburbia
You cant hide, run with the dogs tonight
In suburbia
- Pet Shop Boys
Posted: Thu Jul 17, 2008 7:57 am Post subject: Re: PO Value increases being mis-labeled "inflation&quo
More expensive things does not always mean "money inflation" (= more money).
In the case of PO it is possible that everything gets more expensive due to PO, salaries stay the same, yet the AMOUNT of money stays the SAME too.
It means that people will not be able to buy as much.
It means living standards drop.
This is not money inflation, and increasing interest rates is a problem in this case, as money supply is NOT really growing and so increasing interest rates makes the whole thing worse (even less money available ).
(this of course might *cause* salary increases which then fuels money inflation...)
Joined: Dec 07, 2005 Posts: 1741 Location: Australia
Posted: Thu Jul 17, 2008 8:23 am Post subject: Re: PO Value increases being mis-labeled "inflation&
chenopodium wrote:
More expensive things does not always mean "money inflation" (= more money).
In the case of PO it is possible that everything gets more expensive due to PO, salaries stay the same, yet the AMOUNT of money stays the SAME too.
It means that people will not be able to buy as much.
It means living standards drop.
This is not money inflation, and increasing interest rates is a problem in this case, as money supply is NOT really growing and so increasing interest rates makes the whole thing worse (even less money available ).
(this of course might *cause* salary increases which then fuels money inflation...)
I'm not totally sure I get your point.
But I hope we agree that inflation cannot exits without increase in the amount of money. Increasing salaries by itself doesn't create inflation.
Take Zimbawe as an extreme example. An average worker makes about 250Billion Z$ / month now. A couple of years ago the whole national amount of money could have paid one or a couple of people then they would have run out of money. So if no new money had been put into circulation, there would have been a ceiling when salaries could not go up any further.
The only reason why TPTB hate "wage inflation" is becasue it shows up in the stuff they do their inflation stats on.
As long as money goes into things they like such as properties, financial vehicles, shares etc. they don't really care. But the fact is that increasing property prices isn't good for everyone. For instance first home buyers suffer. But as homeowners are on the right side of the jig, they don't complain either.
Then why you suffenly stated that increasing interest rates is a problem, I don't quite understand.
If we lower interest rates (or keep interest rates lower than inflatio rate) it means it is cheap to borrow money, which then leads to inflation. So if we stop this inflation by contracting money supply, what are you saying is the problem?
(I am using this as a pure schoolbook discussion as increasing interest rates now in for instance US is out of the question.) _________________ Lets take a ride, and run with the dogs tonight
In suburbia
You cant hide, run with the dogs tonight
In suburbia
- Pet Shop Boys
Joined: Dec 07, 2005 Posts: 1741 Location: Australia
Posted: Thu Jul 17, 2008 8:25 am Post subject: Re: PO Value increases being mis-labeled "inflation&
chenopodium wrote:
More expensive things does not always mean "money inflation" (= more money).
In the case of PO it is possible that everything gets more expensive due to PO, salaries stay the same, yet the AMOUNT of money stays the SAME too.
It means that people will not be able to buy as much.
It means living standards drop.
This is not money inflation, and increasing interest rates is a problem in this case, as money supply is NOT really growing and so increasing interest rates makes the whole thing worse (even less money available ).
(this of course might *cause* salary increases which then fuels money inflation...)
I'm not totally sure I get your point.
But I hope we agree that inflation cannot exits without increase in the amount of money. Increasing salaries by itself doesn't create inflation.
Take Zimbawe as an extreme example. An average worker makes about 250Billion Z$ / month now. A couple of years ago the whole national amount of money could have paid one or a couple of people then they would have run out of money. So if no new money had been put into circulation, there would have been a ceiling when salaries could not go up any further.
The only reason why TPTB hate "wage inflation" is becasue it shows up in the stuff they do their inflation stats on.
As long as money goes into things they like such as properties, financial vehicles, shares etc. they don't really care. But the fact is that increasing property prices isn't good for everyone. For instance first home buyers suffer. But as homeowners are on the right side of the jig, they don't complain either.
Then why you suddenly stated that increasing interest rates is a problem, I don't quite understand.
If we lower interest rates (or keep interest rates lower than inflatio rate) it means it is cheap to borrow money, which then leads to inflation. So if we stop this inflation by contracting money supply, what are you saying is the problem?
(I am using this as a pure schoolbook discussion as increasing interest rates now in for instance US is out of the question.) _________________ Lets take a ride, and run with the dogs tonight
In suburbia
You cant hide, run with the dogs tonight
In suburbia
- Pet Shop Boys
Posted: Thu Jul 17, 2008 9:51 am Post subject: Re: PO Value increases being mis-labeled "inflation&
idiom wrote:
What I mean is that people are not catching the idea that the Loaf of Bread today is NOT the same Loaf of bread as four years ago. It is harder to make it now than it was four years ago.
It's not that it's harder to make, at least proportionally harder to make compared to it's price increase, it's that using food for fuel links the two markets. If fuel prices go up, food prices go up because people are paying more for a bushel of corn for fuel than they are for a bushel of corn for food, we then have to pay more if we want the same amount of corn. This ripples through food prices since people start replacing some foods w/ other foods and we see food price increases due to fuel price increases, on top of the direct prices increases we see in food production from an increase in fuel prices. _________________
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