PO Value increases being mis-labeled "inflation"

Gerben

I think people are confusing different types of "inflation" here. The isue people refer to when talking about inflation is price inflation. That means prices denominated in a currency go up. The cause can be that the goods become more scarce, or more money is available for a certain amount of goods.
The second thing is tyres and other stuff like that. Those generally tend to deflate by themselves. Inflation is a good thing there.
O and there is also inflation in the money supply. Joe Average couldn't care less about that. Not untill it affects prices.

korosten · Tar Sands Joined: Jun 09, 2007 Posts: 53

re schoolbook example Smile

Let's assume there was a country that had a constant population (say 1 million people), and a constant amount of coins (money), and a constant economy. (just to make it simpler to discuss it).

Do you agree that in this case, if the money supply does not increase, there is no inflation. Inflation is 0.

If PO makes all the goods more expensive (but we still have the same amount of coins), people will have to buy LESS of everyting - but still no inflation.

In this scenario, since there is no growth in it, interest rates would have to be 0 also otherwise nobody would afford to every pay back a loan!

In real life of course, we have a "growing economy", growing population etc, so we have to constantly increase the money supply in the same manner.

In this case, interest rates can be > 0 because the expectation is that as the economy grows, people can pay back the loan later.

However any additional increase in prices caused by PO is not money inflation and should not be fought via increased interest rates as it would harm the economy.

idiom

seldom_seen · Fission Joined: Apr 12, 2005 Posts: 2068

I think this is one of the most misunderstood issues around peak oil and our economic implosion.

Inflation by definition does not mean rising prices. Prices do not inflate, they go up. The increase in price can be attributed to more dollars chasing the same amount of goods (which is inflation). Or prices can go up because of an increase in demand or decrease in supply.

Under "normal" economic conditions, an increase in the supply of money can more or less stay in line with a growing economy. There is inflation but it doesn't really bother anyone too much. Underlying this is an increasing supply of energy that is required to feed the infinite growth machine.

Peak oil breaks this model over it's knee and flushes it down the toilet.

With peak oil the economy stalls out and oil becomes more scarce. Decreased supply of oil in relation to demand causes the prices to rise. Meanwhile the banking system starts to panic because the economy is grinding to a halt and debt obligations are unable to be met.

This creates a vicious death spiral where the increasing price of oil collides with the bankers who are pounding on the big red panic button that spits out freshly minted sheets of 100 dollar bills. Over and over and over.

We are burning the candle at both ends. One side inflation, the other depletion. This unfortunately doesn't have a happy ending. The banker's policy of monetizing all the bad debt is the only card they have. It's more a less a charade to keep up appearances until they have their island doomsteads readied.

patience · Expert Joined: Jan 04, 2008 Posts: 1761

seldom seen,

That is a very clear, concise analysis of what I see going on! I gotta print that and hang it on the wall for my customers and friends to read.
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MrBill · Expert Joined: Sep 15, 2005 Posts: 5650 Location: Eurasia

patience · Expert Joined: Jan 04, 2008 Posts: 1761

MrBill,

Well, we certainly have scarcity (of oil and to some degree food), and the US has, and is, diluting the currency. I dunno about the other one, but 2 out of 3 has been enough to choke the local economy here.

What bothers me is food commodity prices seem to be lagging the true cost of production, at least from the farmers' POV. That won't help the food situation any. Fertilizer, Seeds, crop chemicals, diesel, and gasoline prices have increased enough that farmers tell me they need $7 corn to do as well this year as they did with $3 corn last year.

A Reuters article yesterday (sorry, no link) said farmers are bidding up the price of used equipment because new stuff is so pricey, and is essentially made to order, that is, there is no inventory to speak of, so if you need a machine in a hurry, you can only get a used one. Just one more distortion of PO.

I'd look for shortages of a lot of things, as PO prices ramp up, due to high cost of production and inventory, plus whatever wrongheaded govt meddling, such as price controls, will cause.

So, if we get a big dose of US$ dilution from bank bailouts (Congress is debating a bill to give Paulson Carte Blanche), then that becomes the hammer that will beat us all to death, as the US economy spirals out of control, or just ceases to be. It won't matter then what caused the problem.
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Local fix-it guy..