But here's the deal:
Irrespective of the Fed's monetization, that increase in debt will be more than offset, and for more than several years, by the decrease in aggregate debt (and hence credit) in the rest of (non-government) the economy. After noodling Mish's point that only Congress can cause hyperinflation by giving money away (or causing capital flight) I tend to agree with him (but just for giggles I did skim through the Federal Reserve Act - again). The Fed is just about powerless to cause hyper-inflation (or any kind of inflation for quite some time.)
Now, with that said... we need to then propose scenarios - "what if's". Let us assume that Iraq does not have a Saudi Arabia export potential (although it might, but for our purposes here let us forget Iraq), and the world's export profile comports with Jeffrey Brown's detailed pdf.file...
The price of Oil would have to rise significantly for the U.S. to maintain a trade deficit (and hence, have a foreign market for its bonds)... i.e. the price of Oil would roughly have to double should imports be cut in half... then, a calculation would have to be made for impacts to the U.S. economy in general for the decline in supply...
I need to noodle this some more... if anybody has anything to add I am all ears....
16 comments:
I've said it before .. short-term, oil prices cannot launch upward for very long. Oil is its very own limiter. Rising oil prices so negatively impacts the economy, that high prices means demand for everything drops, and so oil demand drops, and then oil (and gasoline) prices drop. But this is the short-term. Long-term, when we have time to adjust (downward), oil prices can go to the moon.
Greg,
Why are you still predicting deflation? I'm seeing my cable, water bill and food at Costco slowly creeping up each month (I've been keeping track of this since 2005). Granted luxury items and homes for the middle class has crashed in price, but the price of mandatory services and goods are going up. You and Mish can bs about theories, but I'm getting hit in my pocket and I don't need a college degree to figure out what is happening. Check gold and silver, they are moving up!
Inflation is happening, but the powers at be want you to believe that deflation is still a threat... Stop looking at the bond market it is obviously being manipulated. The purpose of our military is to ensure the world continues to buy our bonds.
Anon,
While us commodity fans would wholeheartly agree several "items of daily life" are indeed going up in price (taxes/fees, vet bills, car repairs, college tuition, health care, etc.), Mish would say that those "pennies" are HUGELY DWARFED by the HUNDREDS OF THOUSANDS of dollars in home and investment equity that has evaporated/dropped since 2007, not to mention the overall drop in (certain) food and energy prices, and lower wage and benefit pressures.
Joe Average sees his Ritz Chips go up 20 cents a bag, and his speeding ticket going from $80 to $140, and that is indeed a tragedy. But a big economy is driven by big numbers, and Mish would say that that is what dictates deflation --- the big picture.
Deflation is not, and cannot be measured in the prices of products - particularly those with a government enshrined monopoly.
Deflation is monetary event, and is truly reflected in the AGGREGATE paid for a good or service.... the price of an individual airline ticket could go up... but if the total $$ received for all airline tickets goes down... this would be a better example of deflation in the price arena.
(The world can do anything it likes, and the world, including more Americans than we thought, are willing today to buy trillions of dollars of U.S. Treasuries, for almost no interest, because they rreally have no choice. The baby boomers are too old and cannot tolerate any more home equity and investment losses. We don't even need the Chinese or Japanese to buy Treasuries anymore. We're buying them now! :))
Deflation is better defined in terms of money and credit, and credit is deflating very briskly.
The problem with the deflation scenario is that it may already be anticipated by the financial markets, and in fact overanticipated if you look at gold prices. The US dollar index is down 50% from its high of 120 in 2001, and gold has quintupled since that level, rising from $250 per ounce to over $1250. This is largely speculation that the dollar will fall further and buying by exchange traded funds. In the long run it is likely to be another bubble. We have already had deflation over the last decade, and the next move by the Federal REserve is going to be a series of rate hikes, which would push the dollar up and gold down again. So the deflationists may be late to the party.
True deflation means there will not be any (Fed) rate hikes for a long, long time. There would not be any need for any. There is no inflation as far as the eye can see ... unless, the oil thing I mentioned above comes into play ...
Remember, as soono as the Fed raises interest rates, all the ARMS and Home Equity Lines of Credit (HELOC) rates rise as well, devastating the banking system.
Re; "Greg T. Jeffers said...
Deflation is better defined in terms of money and credit, and credit is deflating very briskly"
I disagree, that's too simple. Deflation is the devaluation of assets or demand for services, primarily because people no longer want or can afford them.
Economic theory has a problem dealing with it, partly because it hasn't a theory to cover satiation, where we have enough of 'stuff'.
If you have inflation (devaluation of money in real terms) at the same time as deflation (falling values of assets and services) you can have the strange situation of both falling together, so everyone gets poorer in real terms without really noticing except where your internal economy interacts with the RotW.
Its even more complicated when you have parallel situations in other similarly structured economies which can further hide the slide in real values.
Bottom line; all Western economies are in deep debt, none can ultimately trade out because all their trading partners are in a similar situation, and the only countries doing well (e.g. China and India)have wage costs one-tenth of all of us so we can't compete without cheap oil. All solutions are therefore temporary; export natural resources and serious moves to import replacement, for example. All the rest just puts off the inevitable.
Regarding oil prices, the best indication of actual supply & demand factors is the average annual price, which filters out trading hysterics, both on the upside and downside.
The average price of oil to date for 2010 is about $75, which exceeds all prior annual oil prices, except for 2008, when we averaged $100.
But the most interesting metric is the steady progression in year over year annual lows--from $14 in 1998, to $26 in 2001, to $62 in 2009. Each successive annual decline was about twice the prior annual decline. If this pattern holds, the next year over year decline would bring us back to about the $120 range.
The truly scary thing about "Net Export Math" is our very high depletion rate--far in excess of the (so far) slow decline in global net oil exports. Our most optimistic projection is that by the end of 2013, three years hence, Saudi Arabia, Russia Norway, Iran and the UAE (2005 top five net oil exporters) will have shipped about half of their post-2005 cumulative volume of net oil exports.
And then we have the "Chindia" factor. At their current rate of increase in net oil imports, in 2019 Chindia's combined net oil imports would be equivalent to 100% of the combined projected (2005) top five net oil exports.
Our forecast is that the US is well on its way to becoming free of our dependence on foreign sources of oil--as we are forced to make do with a declining share of a falling volume of global net oil exports.
To clarify slightly, when I am talking about successive annual declines, it's the average annual oil price for a year showing a year over year price decline. Here is the annual chart of US spot crude oil prices:
http://www.eia.doe.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=A
So the pattern is $14, $26, $62. . . is $120 next?
But on the other side :) ...
1) The U.S. is overflowing with oil, natgas, gasoline and every other product that is made from oil, in storage.
2) China at least is so far out on a limb with its economy, and their debt piling up, that their middle-class need for everything (all commodities including oil-based commodities) could crumble.
If the oil supply (from whereever you get it) is dropping, but the oil demand is dropping faster, there is no peak oil problem. Demand matters.
(Skrebowski found that out the hard way -- the world was supposed to end when the supply-demand lines crossed in 2008. They didn't, and it didn't)
Pimco made an $8 billion dollar bet against deflation with the writing of long term derivative contracts against deflation.
They think the odds of a Japanese style lost decade are around 25%. They put their money where their mouth is.
http://noir.bloomberg.com/apps/news?pid=20601010&sid=aqqEDrWMDO3w
Bur,
I agree that US demand is weak, and has been since 2005, which is my point. We are having to reduce our consumption, as developing countries take a greater percentage of global net oil exports.
Bur,
The problem of peak oil IS shrinking economy. It is NOT lines at the gas pumps. If the free market prevails, there will NEVER be lines at the pumps because the price point will be reached that causes demand to equal the supply. In short, it will be too expensive to buy. Most of us will not be able to afford much. The outcome of peak oil is huge unemployment and economic displacement. THAT IS PEAK OIL. If you think that is not a problem, I don't know what is.
Regards,
Coal Guy
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