Just like that, gas prices are inching over $3.20/gal.
Anyone else notice? BTW, I shop a lot at Costco. Lots of paper for my twin Canon workhorses producing funding packages, loan docs, copies etc... Prices for 5000 count 8x11 paper used to be around $22/box a year or so ago....today...about $27 or so.
I do at least 80% of the consumer staples shopping (food) for our family. Several Costco products in my fridge that hovered around $9.99 are now about $12.
I do at least 80% of the consumer staples shopping (food) for our family. Several Costco products in my fridge that hovered around $9.99 are now about $12.
Comments
As a global recession picks up steam later this year, the fall in demand will take the wind out of oil, copper, gold, and many other commodities.
In fact, I fully expect to see $50 a barrell oil by the end of 2009.
So yeah, prices are going up and your point about paper prices rising is significant. It tells me that we're starting to see inflation on more durable goods (rather than just gas and food prices).
FWIW, 4% inflation coupled with a 10% median price drop in Seattle this summer means prices will be falling faster than they were rising in real terms during the boom. 10% + 4% = 14% whereas 15% - 3% = 12%.
Boy, someone sure is abusing our State's medical marijuana laws. Time to get some fresh air Sniglet. Perhaps you should mount up the training wheels and go count some more For Sale signs around Lake Sammamish?
I am getting quite used to being the lone voice on issues (just ask all my friends and family who thought I was batty for selling my Bellevue house in 2003), so I am happy to be the token deflationist on the SeattleBubble.
For your deflationary scenario to come to pass are you counting on some sort of systemic failure of the banking/financial system (ie some major banking institution going under)? I could see deflation if you had significant banks go bankrupt and people hit the panic button but I really think the risk of that is fairly low. IMHO inflation is the name of the game...especially in 2009.
The core deflationary idea I am thinking of is that the economic boom, and general asset appreciation, has largely been the result of the credit bubble. The same expansion of easy credit that has driven up housing prices was likewise causing commodities to hit the stratosphere too.
It follows then, that if there is a significant contraction of credit that asset prices will fall across the board, and not just in real-estate.
I believe there is ample evidence that the credit contraction has already begun, and I think it will get MUCH deeper. As a result, the global economies will begin contracting, as demand dies as everyone (not just Americans) scrambles for cash to pay off debt.
My prediction: all assets will deflate in value. The dollar will rise in value.
Inflation (classical definition): increase in money supply
Deflation : decrease in money supply
First of all, I would argue that the classical definitions of these terms is far more useful than just looking at prices of commodities and materials.
What we are seeing right now, despite lower interest rates, is a the destruction of federal reserve notes in the system. Banks are writing down assets, houses are losing value, and stocks are becoming cheaper. Many of the assets that contributed to the bubble are actually worthless, and are getting wiped off the books, and therefore destroyed from the system. This is deflation.
The last two great deflationary spirals in recent memory (Japan and US during the great depression) seem to have more similarities to our current crisis than Germany during WW2 (hyper inflation scenario).
The money supply has definitely been decreasing since summer of 2007. Keep in mind that credit is money. When more loans are made, the money supply increases. When fewer loans are made, or hedge-funds "de-leverage", there is a contraction in the money supply.
We have been witnessing one of the swiftest falls in the money supply that has ever occurred.
Sure commodity prices are high today. But as global demand drops (in line with GDP), suppliers at the marginal end of the curve are forced to shut down and the clearing price drops dramatically.
You can actually build a supply curve for most commodity markets - and when you do this, you can plainly see how just adding a little bit of high-cost capacity at the right end of the curve in boom times raises the clearing price for the whole market. I did this for a consulting gig in the aluminum market. It's a remarkably accurate approach.
When you start seeing articles about refineries, lumber mills and smelters shutting down or being mothballed - that's the marginal/high cost capacity coming off line. You'll see prices falling quickly after that.
here's an example of exactly what I am talking about from Alcan. You can see what happens to clearing price when demand hits a peak. Same thing with oil, copper, etc etc
I agree in sentiment, but I think the example you choose is too complex for any reliable predictions that far in the future.
Yes, a recession/depression with deflation will tend to reduce oil demand, thus lowering the price. Especially if it's a global recession and demand falls across the world. So from a demand side, I agree with you (though I might have guessed something closer to $65 a barrel myself).
At the same time, it's unclear what supply will do. I have heard reports that Saudi Arabia has already reached peak oil. I refuse to make any assumptions regarding what Iran or Venezuela might do. And it's probably equally hard to figure out what Iraqi supply will be nearly two years from now.
Considering that, if you suggested metals or cement or wood prices would drop by half, I'd agree.
Why do you suppose that the Fed has not been at all concerned with the threat of deflation? Search through the latest FOMC minutes and you'll find that deflation is not even discussed. Instead, they seem to be much more concerned with the threat of inflation.
Huh? They clearly aren't very worried about inflation since they are LOWERING rates. The Fed talks a lot about "risks" to the economy and financial sector. Just what might those risks they are concerned about be? Declining prices, of course.
The Fed doesn't come right out and say they are worried about "deflation", but the fact that they are dropping rates and have concerns about housing and finance clearly demonstrate they are far more obsessed about deflation than inflation.
By the way, the Fed is almost always behind the curve fighting the last war. The Fed has spent 2 years raising rates to help ensure that we wouldn't have stag-flation like the '70s. Unfortunately, the real problem was a brewing deflationary asset price crash like the 1930s.
And Bernanke is supposed to be an expert on the depression...
The Fed is plenty worried about inflation but they are more worried about economic growth which is why we see them choosing to cut interest rates even though it will mean more inflation.
If you're worried that we're following in Japan's footsteps and that a deflationary spiral is right around the corner, you should take a look at this paper: http://www.federalreserve.gov/pubs/ifdp ... fdp729.pdf
You'll notice Bernanke being cited several times.
And oh yea, the ONE oil refinery blowup should easily account for all of the runup as almost all U.S. gas comes fron that ONE plant.
Will there be a "probe"?
The only "probe" is the one you get every time you go to the pump and bend over for Oily Dick and his cronies (the ones he has not yet shot).
No, I am not worried about a deflationary spiral, I am looking forward to it. We need a good re-valuation of assets to work out all the mal-investments in the economy, and make it easier for people to determine where they really ought to be putting their money (i.e. it's not in McMansions).
I saw this paper years ago, and don't really put much stock in it. The Fed might bluster, but in the end I think their hands are tied. The side-effects of the proposed "extraordinary" measures that have been proposed to prevent deflation are worse than the disease, and the Fed knows it.
The US will face deflation, it will just come about by a slightly different route. In fact, one could argue that the latest credit bubble was just the result of the Fed attempting to avoid deflation back in 2002, and all they accomplished was to push off the inevitable by a few years and make the resulting mess even worse.
At some point no amount of wishful thinking can ignore the effects of gravity after you walk off the edge of a cliff.
By 2015, I'm sure he'll have plenty of first hand experience with it. Or are you talking about some other depression.
Your definition is not quite right. Inflation is an increase in the price of goods and services in an economy. One way people (especially monetarists) measure inflation/deflation is by looking at money supply. An increase of money supply can happen in deflationary times (see Japan in the 1990's).
I'm not sure whether we're headed for inflation, deflation, or stagflation, but let's keep the terminology straight.
No, my terminology is correct.
Lets look at how wikipedia defines deflation:
"Therefore, under the usual contemporary definition of inflation, 'deflation' means a decrease in the general price level over a period of time (Barro and Grilli 1994, p. 142). Alternatively, the term was used by the classical economists to refer to a decrease in the money supply; some economists, including many Austrian school economists, still use the word in this sense. The two meanings are closely related, since a decrease in the money supply is likely to cause a decrease in the price level."
Look at inflation/deflation in the classical sense. It is much more useful to truly understand what is taking place. By following the money supply, and not price action, you will understand what is happening. Commodities prices are much more volatile and subject to rampant speculation which often drives the price just as much as does demand.
Money in the system is being destroyed, not created. While we may be subjected to certain PRICE inflation, in the long term we are in the midst of a deflationary spiral and ultimately this is why the Fed is choosing to cut rates and not raise them.
"under the usual contemporary definition of inflation, 'deflation' means a decrease in the general price level over a period of time"
AND
" a decrease in the money supply is likely to cause a decrease in the price level"
I just think people sometimes confuse the terms. Inflation of a good or service means its price increases. You can't say money supply of a good or service can you?
Besides, the effect people care about is changes in prices for things they buy. In Japan in the 1990's there was a deflationary environment (prices fell), even while money supply rose. According to your definition, that was an inflationary environment!
I'm agreeing with you that changes in money supply can certainly signal inflation/deflation.
The money supply is contracting and asset prices are declining as well. Real-estate and stocks are on the leading edge of the price declines, but commodities and services will follow eventually as the recession picks up steam.
I understand your points on deflation, but for oil to drop by half, we'd need both a surge in supply and a significant decrease in consumption. We'll be lucky if the supply remains stable for the next 2 years. And with 70-80% of the world's production in countries that are at best unstable, that's asking for a lot. I can see domestic consumption declining slightly, but oil consumption tends to be the last thing cut out. People still need to drive, companies still need to ship goods, airplanes still need fuel to fly around. And for every barrel we don't consume, India, China, and the other rapidly expanding 2nd world countries will use two. For the price of oil to really drop, The US, Europe, China, India - basically the entire developed world - would need to have a major recession.
Unlike many other assets, the price of oil was not built on the credit bubble.
This is partially true. The price of oil was built on economic expansion (locally and abroad). If economic activity stays the same, then oil stays 'high'. But if people stop buying HD TVs, new cars, and the like, then demand definitely drops. It is very likely that the deflation of the credit bubble will limit consumption, and that is likely to lower oil prices. The real question is by how much. Keep in mind that OPEC likes prices where they are.
That's not true. You just need demand to drop enough to shift the high-cost marginal production capacity off line. Like Alberta oil sands. And Iowa ethanol. That's why I posted that aluminum cost curve. Every commodity works the same way. The market clears at the point where supply = demand, and a cost curve is the supply curve. same thing. Every market I have ever seen has the same phenomenon of a huge spike up at the far right hand side of the curve. (e.g. alberta oil sands and iowa ethanol). Demand drops by 5% and those supplies have to either shut down or sell at a loss (until they ultimately shut down).
You are right that to really be safe from future price spikes you want to add new capacity at the left end of the curve - which is unlikely - but demand doesn't need to drop significantly for price to drop. The curve isn't linear.
I'm not predicting it drops back to $50 - but I wouldn't rule it out - and I certainly don't think it goes up from here given where I believe demand is headed.
Oh - and FWIW, I spent two years working in oil trading - I have a pretty good understanding of how these markets work
From Bloomberg, Feb 20th:
`We should be looking at oil in the $120-to-$150 area by the end of the year without any major changes,'' said Peter Schiff, chief executive officer of Darien, Connecticut-based brokerage Euro Pacific Capital, which has $1 billion in customer accounts. ``It's not just oil; all commodities are moving higher. Soybeans are at $14 a bushel and platinum at $2,000 an ounce.''
For those of us who are 'Grasshoppers', what is a simple way to understand what causes prices to go up vs. down and it's impact on the economy.
I am not all that partial to Messr Schiff's predictions. Although I agree that we are headed for a severe economic downturn, I don't buy his theory that the dollar will tanks, and that it is primarily the USA that will hurt the most. I think Peter will be very surprised to see all his investments in China go poof when their bubble pops too. All his positions in commodities (which he talks about incessantly) aren't likely to fare well either.
His book title: Crash Proof: How to Profit From the Coming Economic Collapse says a lot about where his predictions are coming from.
In the extreme, almost all metals can be found in trace amounts in oceans. If you want uranium bad enough, you can filter it out...it just doesn't make economical sense right now. Even more extreme, you can mine the moon or asteroids, and if prices were high enough for some commodities...it might actually be worth it.