PDA

View Full Version : Looks, walks, or talks like an "accepted axiom" duck? ...



Contemptuous
01-12-08, 01:13 AM
Here is Ken Rogoff from Harvard's Economics Department, Allen Sinai from Decision Economics, (and the Washington Post for good measure) all routinely referring to the "inflationary impact" of oil price shocks.

But if you wander over to iTulip after reading these establishment economists, you then seem to step through an airlock, into a universe where there simply has been "no price shock" - because here one is reads (embedded in many arguments) the assumption that to the wise and discerning "oil has gone nowhere" in price, in terms of gold.

All memory has been erased, that as recently as 2006 around here, gold was not even being referred to as money at all. Back then some people around here were patiently explaining to unsophisticated newbies that gold had stopped effectively being money after Nixon closed the gold window, and anyone falling into the credulous misapprehension that gold was money would come to a bad end.

Well, there has been somewhat of a sea change. Since then, references to gold around here have discreetly acquired a solid and unquestionable monetary attribute.

Of course, commodities rises have been paced by gold's rise, MORE or LESS. But no-one offers a murmur of disagreement on THE THESIS. The THESIS says, gold's rise alongside commodities nullifies any possibility of any "extra" source of inflation coming out of some "real" commodity price action. Any inflation surrounding commodity price action is coming from "general inflation" of assets across the board, from the "classic" sources of inflation - i.e. monopoly money. End of story.

Please note this little "anomaly" - when you read these economists below. iTulip's contributors who casually employ as an self evident AXIOM that "commodities rise is a monetary illusion as they've not risen vs. gold" - are leaning on narrow definitions which the two economists below imply are unnecessarily limited?

We had another thread on these pages which discussed how inflation might really spring partially out of the real world cost inputs of "making stuff", but everyone got really dug down into their positions, "classically academic" about it. There was complete unanimity - dry, classically derived, academic unanimity - that inflationary impulses ONLY ever emanate from central banks. Whew! There can be no other significant other inputs to inflation. But when other economists not ahering to this narrow description were mentioned, everyone kind of faded away. Seemed there were a lot of people very invested in this "exclusive cause" thesis - and some of these get grumpy too - if their pet theses are contradicted.

We might consent to remember that it's not just these two economists below who point out routinely that there are historically real inflationary outputs coming OUT OF sustained and sharply rising commodity (notably energy) prices. iTulipers can step out into the broad "blue pill world" where everyone else is operating under what iTuliper's presume is the flat holographic unreality, and notice there are more than a few economists who routinely refer to the "inflationary inputs from energy" feeding into economies at a global level.

Meanwhile, I have never read once any other iTuliper question the THESIS that "energy and commodity prices have not risen in any significant sense because they are flat against gold" - ALL are singing from one hym book - but we must note, startlingly, that these economists seem to be singing from a different hymn book entirely. They must be the ones in the "blue pill world", right? :confused: :confused: :confused: Couldn't be us over here on this topic!??

Do any of you, who unquestioningly buy the "nothing's risen in real price against gold so there are no inflationary outputs emanating from commodities" theory, feel even the slightest bit apprehensive when you notice this spartan and purist interpretation of inflation is not exactly taken unquestioningly as gospel by a lot of observers outside the confines of this small community?

After all, for you to be right, Ken Rogof and Allen Sinai have to be quite wrong - in their references to the "inflationary effects of energy" - no? Someone should inform these two grizzled economists that there is no such thing as an "inflationary output from real energy price rises". :D ... iTulip's disciplined (and all very like-minded) troopers could set them straight on this in short order, no?


QUOTES:

<< "Energy price increases, especially now that energy once again is becoming an ever-larger part of consumer spending and business costs, are both recessionary and inflationary," said Allen Sinai, chief global economist at Decision Economics. ... "They add to costs and can be part of an upward spiral of price inflation, which possibly feeds back into wage inflation and more price inflation." >>

________________


ARTICLE:

STIMULUS UNLIKELY TO COUNTER THE RISE IN OIL PRICES

By Steven Mufson (http://projects.washingtonpost.com/staff/email/steven+mufson/) - Washington Post Staff Writer - Friday, January 11, 2008; Page D01


Just at the moment the U.S. economy could use a boost, the recent surge in oil prices is having the opposite effect.

Even though more economists are calling for a stimulus package of spending increases or tax cuts to keep the U.S. economy out of recession, climbing oil prices since September have had all the negative effects of a tax increase -- one big enough to outweigh any likely stimulus.

The more-than-$30-a-barrel increase in oil prices over the past five months is like a $150 billion tax increase, said William D. Nordhaus, a Yale University (http://www.washingtonpost.com/ac2/related/topic/Yale+University?tid=informline) economics professor. By paying more for oil, Americans have less left to save or spend. "It is clearly contractionary," Nordhaus said.

Kenneth Rogoff, a Harvard University (http://www.washingtonpost.com/ac2/related/topic/Harvard+University?tid=informline) economics professor and former chief economist at the International Monetary Fund (http://www.washingtonpost.com/ac2/related/topic/International+Monetary+Fund?tid=informline), made a similar estimate. "The price of oil rising even from $80 to $100 a barrel is like adding $150 billion in taxes," he said. "It's quite a wallop."

That, Rogoff said, "is far bigger than any fiscal stimulus being discussed in Washington at the moment." Moreover, he said, "it's worse than a tax increase because the money is going to Saudi Arabia (http://www.washingtonpost.com/ac2/related/topic/Saudi+Arabia?tid=informline) and Russia (http://www.washingtonpost.com/ac2/related/topic/Russia?tid=informline) rather than the U.S. government."

Rogoff estimated that the increase in oil prices over the past five months "could easily translate into half a percent of GDP." ... He added that losing half a point of growth could be enough to throw the weakened economy into recession.

Higher oil prices not only slow growth but also add to inflation, raising the specter of stagflation like that of the 1970s.

"Energy price increases, especially now that energy once again is becoming an ever-larger part of consumer spending and business costs, are both recessionary and inflationary," said Allen Sinai, chief global economist at Decision Economics.

And that, he said, makes higher oil prices "a very bad kind of tax increase. They add to costs and can be part of an upward spiral of price inflation, which possibly feeds back into wage inflation and more price inflation."

All that makes it more difficult for Federal Reserve Chairman Ben S. Bernanke (http://www.washingtonpost.com/ac2/related/topic/Ben+Bernanke?tid=informline) to fight inflation and an economic slowdown at the same time. "When energy prices are rising enough to hurt the economy and add to inflation, the central bank is conflicted," Sinai said.

Some of the damaging effects of oil prices are showing up in company earnings. On Wednesday, Alcoa (http://financial.washingtonpost.com/custom/wpost/html-qcn.asp?dispnav=business&mwpage=qcn&symb=AA&nav=el) reported that it was being squeezed by slumping demand for aluminum in North America (http://www.washingtonpost.com/ac2/related/topic/North+America?tid=informline) and higher freight and energy costs. The company said 40 percent of its cost increases in the fourth quarter were energy-related.

Only a few months ago, many economists marveled at the relative absence of ill effects from high oil prices, which tripled from late 2001 through late 2006.

In a paper titled "Who's Afraid of a Big Bad Oil Shock?" published in September, Nordhaus wrote that "the economy weathered an increase in real oil prices . . . without any major strain." He credited Fed officials, who focus on an inflation index that excludes oil and food prices. That prevented them from unnecessarily reining in growth. And he said economic "tailwinds" compensated for oil prices.

Since Nordhaus wrote that however, oil prices have increased 50 percent more and, as in the 1970s when the economy was rocked by two oil price shocks, other problems are also hurting growth. The United States also imports about 50 percent more oil than it did in 1979.

In his paper last year, Nordhaus noted that high crude oil prices had only half the expected impact on wages and the prices of other goods. The reason, he speculated, was that Americans, who have seen big swings in oil prices since the 1970s, viewed the latest increases as fleeting. Now, however, they may have decided that high oil prices are here to stay.

Perhaps as a result, oil price increases may be washing through the economy, not only affecting retail gasoline prices but also airline tickets, packaging and delivery services. The thirst for motor fuel, mandates by Congress and a push to reduce dependence on oil imports have led to an increase in demand for corn-based ethanol, boosting food prices.

In an interview this week, Nordhaus said, "It may be that some of the reason for price acceleration over the past year or so is that some of these [energy] price increases had been coming out of profits of airlines and places like that, and they may now be getting passed along."

[ NO! YA THINK REALLY ?? :eek: :eek: :eek: ]

Bernanke was a young professor when the Fed (http://www.washingtonpost.com/ac2/related/topic/U.S.+Federal+Reserve?tid=informline) wrestled with oil shocks and stagflation in the late '70s. In a Feb. 20, 2004, speech, he said the late-'70s oil-price spikes alarmed the Fed more than the recent ones have. "In a low-inflation environment, with stable inflation expectations and a general perception that firms do not have pricing power, commodity price shocks are not passed into final goods prices to nearly the same degree as in a looser monetary environment," Bernanke said.

In another speech that year, he warned that an inflation-averse central banker seeking to enhance his credibility and deliver low inflation could "react too aggressively (from society's point of view) to contain the inflationary impact of the shock."

Yesterday, however, he sounded more worried. "The same increase in oil prices that may be a negative influence on growth is also lifting overall consumer prices and probably putting some upward pressure on core inflation measures as well," he said. "Any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank's policy flexibility to counter shortfalls in growth."

Sinai blames U.S. policymakers for not reducing energy consumption. "The lack of will of the United States, in a forward-looking way, to confront energy -- how much we use and how much it costs and what it might do to our economy -- is a horrible blot on the policy record of the United States," he said. "Our country simply went to sleep. We have not had the sense of urgency we should have had."

________________


My takeaway? Beware anything that looks, walks or quacks like an ESTABLISHED AXIOM-DUCK around these pages. Too many subscribe to these purist interpretations of the source and nature of inflation - without further question. Maybe iTuliper's are all right about this, and Ken Rogoff and Allen Sinai need to go back to school huh? Or there's another possibility. Might it be there is at least one altogether too hermetic and academic AXIOM subscribed to around here which falters when confronted by the "vexing intellectual complications" of resource depletion?

FRED
01-12-08, 05:07 PM
Couple of points.

1) Gold was only ever money because governments made currency out of it, made paper currency redeemable in gold, and used gold as currency and bank reserves. But there is a world of difference between money and currency.

2) iTulip's long standing position on gold is that as global central banks cooperatively devalued currencies starting in 2001, gold began to behave like a currency. In fct, we were so sure that gold was going to evolve back into a monetary role for international currency transactions that we picked up the domain: http://www.fourthcurrency.com.

3) The dollar price of oil cannot increase if the Fed does not print the money needed to pay for it. The Fed has printed the money to pay for the oil, but all the money printed to meet that demand will not necessily get spent on oil. There is no way to set a policy of "these dollars are for oil and these are for platinum and these are for gold." The markets do that. Everything goes up but at different rates depending on the dynamics of each commodity market. Some may even fall for a period (e.g., copper).

Spartacus
01-12-08, 05:57 PM
my understanding is that "royalty" appropriated an occurring practice. The original use came from the populace, although probably from the more technically savvy merchants, (not usually classed as kings)

according to Robert Wright and others a large number of civilizations have develop ed like so:

direct commodity barter
<big><big>&rarr;</big></big> "big man" / tribal chief and associated thugs co-ordinate an economy (though most economic activity is still barter)
<big>&rarr;</big> economy becomes more complex, starts using metallic money
<big>&rarr;</big> economy grows, "big man" sometimes tries to squash metallic money but eventually uses it himself
<big>&rarr;</big> at some point the economy becomes big enough for the "big man" to be called king. Sometimes the "big man" does not grab control of money until he is king

There were of course lots of cases where all this is short-cut by more skilled societies giving later trade skills to less skilled societies. These may be the cases where historians say "the king introduced gold as money"


Couple of points.

1) Gold was only ever money because governments made currency out of it, made paper currency redeemable in gold, and used gold as currency and bank reserves. But there is a world of difference between money and currency.


Standardized coinage across a kingdom only happens because of the ruling classes. But lots of sub-segments do it on their own before that.

Contemptuous
01-12-08, 06:06 PM
Fred -

Thanks for your considered reply.

You wrote: << The dollar price of oil cannot increase if the Fed does not print the money needed to pay for it. The Fed has printed the money to pay for the oil, but all the money printed to meet that demand will not necessily get spent on oil. >>

Yes of course, this is thoroughly understood by me, as well as I assume everyone who visits here and reads around a bit. But it's the dry, textbook definition of inflation. The Fed, not only now, but well prior to even the abandonment of the gold standard, 'printed' money as a matter of course to accomodate a growing economy. All nations have grown their money supply even prior to abandonment of the gold standard - first the straight gold standards, and then the fractional gold standards - they have routinely grown their fiat money supplies to accomodate economic fluctuations for a very long time.

The observation therefore is that all goods and services exist in an environment of 'fluid monetary aggregates'. In such an environment it is academic to state that one commodity's price rise has only occurred 'due to government printing of more money'. Government is adding money constantly to accomodate myriad impulses.

The statement of the above economists, and many others, is an observation that there is such a thing as a rising real cost of resources, in certain economic cycles, and this comports a cost input, where energy resources are concerned, with an unusually broad range of outlets into GDP worldwide. Thus if this commodity in certain cycles increases sharply in cost (leave aside whether the cost is 'real' or 'inflation derived') - this causes a sharp drain on circulating money worldwide and imposes a sharp pressure upon the issuers of currency to compensate.

To suggest, as iTulip has long done, that the 'pressure' imposed by sharply rising energy input costs upon global GDP is not 'inflationary' because inflation can only be 'created' by central banks is a purist or exclusionary or very narrow definition of the causes of inflation. It is texbook maybe, but it defines inflation in a way which excludes one of the largest future potential inflationary inputs imaginable - peak 'cheap' oil.

I find this dry and delimited explanation of the sources of inflation - in the context of the once in a half millenium event that iTulip also acknowledges is approaching in the energy sector - to be a very hesitant and unnecessarily narrow accomodation to the complexity of future inflationary factors.

____________

I am also dismayed by the remarkable 'conformity of thought' among so many here who assume the textbook definition of inflation in the above context is the sufficient to understand what's going on when facing $300 per barrel oil.

No one appears to have a clue that this might comport any input at all upon the resulting monetary aggregates, as the price for a large array of goods and services rises sharply to accomodate the rising energy input cost. Is there anything at all controversial about that?

Inflation? What inflation? If the banks get stern and austere (I'm led to understand), they'll squelch any inflation coming out of $300 a barrel oil! Or if they don't "demand destruction will!" - I think that's total nonsense. $300 per barrel oil will impose such sharp price rises on the essential input costs of all industrial society as to make a massive monetary accomodation an extremely high probability.

I've tried to pose this question - < PEAK "CHEAP OIL" WILL IMPOSE MASSIVE INFLATION > but it's met with the academic reply - 'inflation belongs to the banks to produce". To my admittedly rudimentary understanding, $150.00 oil is already in the bag, and we are careening towards the $300 mark in 5-10 years. This input is about to hit our inflation underpinnings like a two by four across the side of the head.

Anyone here who says they 'understand' peak cheap oil - and claims they have thoroughly examined it's relevant aspects, and after this strenuous and tiresome exercise would like to get back to their cherished topics of 'studying inflation in all it's guises' is maybe conducting a rather spotty overview of inflation's manifestations, because they missed this one. What the hell have they understood if they don't grasp that $150.00 oil and $300.00 oil will put a very large pressure upon governments to further loosen their monetary aggregates?

FRED
01-12-08, 07:02 PM
my understanding is that "royalty" appropriated an occurring practice. The original use came from the populace, although probably from the more technically savvy merchants, (not usually classed as kings)

according to Robert Wright and others a large number of civilizations have develop ed like so:

direct commodity barter
<big><big>&rarr;</big></big> "big man" / tribal chief and associated thugs co-ordinate an economy (though most economic activity is still barter)
<big>&rarr;</big> economy becomes more complex, starts using metallic money
<big>&rarr;</big> economy grows, "big man" sometimes tries to squash metallic money but eventually uses it himself
<big>&rarr;</big> at some point the economy becomes big enough for the "big man" to be called king. Sometimes the "big man" does not grab control of money until he is king

There were of course lots of cases where all this is short-cut by more skilled societies giving later trade skills to less skilled societies. These may be the cases where historians say "the king introduced gold as money"



Standardized coinage across a kingdom only happens because of the ruling classes. But lots of sub-segments do it on their own before that.

The ruling classes tend to adopt the most popular coinage among the most politically and economically significant sub-segment(s) in order to most efficiently collect taxes.

Contemptuous
01-12-08, 07:14 PM
Fred - can you offer any clarification regarding imputing relationships between $150 and $300 oil and the monetary aggregates?

FRED
01-12-08, 07:32 PM
To suggest, as iTulip has long done, that the 'pressure' imposed by sharply rising energy input costs upon global GDP is not 'inflationary' because inflation can only be 'created' by central banks is a purist or exclusionary or very narrow definition of the causes of inflation. It is texbook maybe, but it defines inflation in a way which excludes one of the largest future potential inflationary inputs imaginable - peak 'cheap' oil.

This is why we broke Energy and Money up into two parts. The first part is about the difficulty of separating money supply and demand from oil supply and demand. In Energy and Money Part I: Too Little Oil or Too Much Money? (http://itulip.com/forums/showthread.php?t=394) we say:

"While it's hard to separate money supply and demand from commodity supply and demand factors, a continuously rising price of oil along with other commodities over an extended period of money growth implies that expensive oil may be due at least as much to an excess of money as to an tight oil supply. Of course, it's not a central banker's job to tell you that. It's his job to tell you that everything's going to work out just fine.

"No one can say for sure how much the rise in the prices of oil and other commodities are related to the money supply, to the risk premium added by the world's first "pre-emptive war," to nationalization of oil and gas production in Latin American countries. One thing is certain: if central banks significantly reduce the money supply to contain the rise in assets prices, signficant deflationary forces are likely to be released that the Fed may find difficult to control. This is why I believe the Fed's stated effort to withdraw liquidity will either not be followed by serious action to achieve it, or will be followed by an even more extreme reflation campaign than followed the brief period of deflation that resulted from the collapse of the stock market bubble in 2000.This was published on the AlwaysOn Network 4/20/2005, by the way.

The question is how the increased demand for money by a shortage of cheaply extracted, high quality oil creates commodity price inflation.

The phrase "inflation is first and foremost a monetary phenomenon" is meant as an antidote to the commonly repeated misstatement in the business press that "rising prices are creating inflation." It's a bit like calling yourself a cold because you have caught a cold. Rising prices are a symptom of inflation; they are not inflation. Further, oil does not become a source of inflation in the economy because its price has been inflated by a surfeit of dollars relative to the demand for dollars needed to meet the supply of oil available to meet demand for oil. Yet the phrase "inflation is first and foremost a monetary phenomenon" is also not all that useful in real life, because if inflation did not cause prices to rise, who'd care about it? It is the impact of inflation that one cares about, thus the focus on the symptoms and the general confusion of the symptoms for the cause. One does not buy gasoline with M1 or MZM but dollars. Hold oil demand and supply static, when M1 or MZM are in higher supply it takes more dollars to buy the gasoline than when there are fewer. Start futzing with the oil supply knob at the same time and the heavy confusion sets in.

Contemptuous
01-13-08, 12:10 AM
... difficulty of separating money supply and demand from oil supply and demand. ... I look around and see that nowhere is this topic even marginally addressed in reader contributions or threads. Why do you suppose that is - are readers adequately aware that all commodities price rises genuinely have two components, one government engendered and another component of prices genuinely driven by fundamentals? I've read a lot of references on this website over many months to commodity prices being driven exclusively by currency factors alone? Has iTulip been interested to make this distnction clear to readers, insofar as the oil/inflation topic will become central in coming years?


... While it's hard to separate money supply and demand from commodity supply and demand factors, a continuously rising price of oil along with other commodities over an extended period of money growth implies that expensive oil may be due at least as much to an excess of money as to an tight oil supply. ... That there is a sizeable component of the energy price rise due to excess money is well known on these pages, and requires no further clarification. Your response does not venture into any reference of the nature or interactions of the other energy price component - the "real" price rises - or their effects upon central bank monetary policy - i.e. "also causing more inflation". Is this adequately covered on these pages?

Regarding sharp and sustained, long term, "real" permanent price rises - at $300 oil, how exacerbated does this "feedback" pressuring the banks to release ever more fiat inflation get? Can runaway, long term soaring prices of energy beget massive issuance of fresh fiat money in a kind of spiral complementing the original pure fiat inflation? What about at $400 or $500 oil? These are legitimate questions given what's become apparent we will encounter in 20 years. That was my question, but it was not addressed in your reply.

I can comb this entire website for iTulip explicit references to any oil price rise that is not due to excess money, even the faintest reference to this novel concept, and come up with zero references. Is this complicated dynamic covered anywhere here, and are iTulipers apprised of the complex two way mechanism which may exist between oil prices and fiat paper?


"No one can say for sure how much the rise in the prices of oil and other commodities are related to the money supply ... One thing is certain: if central banks significantly reduce the money supply to contain the rise in assets prices, signficant deflationary forces are likely to be released ... Your reply is a reaffirmation of my question's thesis - in a world of $300 oil, reducing the money supply would also be catastrophic, even if the massive debt loads did not exist. My thesis is that $300 oil reaffirms, and even coerces the bias against tight money. It's not overwhelming debt alone which is doing so.

Your reply only obliquely refers to the question "if oil goes to $300 a barrel, won't governments be constrained to further loosen monetary restraint? My specific question was : Does $300 oil induce CB's to keep money and credit loose, and if so does that constitute an inflationary input?


... The question is how the increased demand for money by a shortage of cheaply extracted, high quality oil creates commodity price inflation. In truth, the primary question I was trying to introduce, was merely to whether a shortage of cheaply extracted oil ever even could create commodity price inflation. This seems to have been regarded as a preposterous idea here by many ther contributors only a few weeks ago? I understand you are acknowledging that it does do so in part?

If you'll recall - in a previous thread only a few weeks ago, devoted to "what is inflation in commodities?" a large number of iTulipers soundly rejected the thesis that commodities scarcity could in any way cause the central bank expansion of money? That is, that "sustained commodities price rises can cause inflation also"?

Perhaps this should now be clarified in an editorial, as a lot of people here seem to be under the mis-apprehension that inflation only can be "caused" by the banks in a single direction?


The phrase "inflation is first and foremost a monetary phenomenon" is meant as an antidote to the commonly repeated misstatement in the business press that "rising prices are creating inflation." This is clear and evident to all readers here, and does not need to be further clarified, let alone established.


... Further, oil does not become a source of inflation in the economy because its price has been inflated by a surfeit of dollars Yes, not the component of oil prices which was created by the surfeit of original dollars. However as you acknowledged previously, (I trust) - there was another component of energy prices, that which is distinct and separate from prior created excess money, which is genuinely a scarcity or demand premium - and which can and will directly influence and cause the issuance of fresh money, which causes more inflation.

This is by no means a minor point - when we are transitioning from $100 oil to $300 oil, the genuine scarcity and consequent "political premium" will escalate to become a very important part of the total cost - this portion is the "real cost" and it will get a lot larger. Therefore iTulip stating "does not become a source of inflation ... because it's price has been inflated by surfeit of dollars" risks becoming a solipsism in the context of a further $200 increase in the nominal price?


... Yet the phrase "inflation is first and foremost a monetary phenomenon" is also not all that useful in real life ... This was very much my point also.


... Hold oil demand and supply static, when M1 or MZM are in higher supply it takes more dollars to buy the gasoline than when there are fewer. Start futzing with the oil supply knob at the same time and the heavy confusion sets in. ... This topic has in not been adequately deciphered on these pages. There does indeed remain confusion on the inputs and outputs of oil prices to "inflation" - and that confusion to my view exists right here at iTulip, insofar as many of your contributors only weeks ago were stating categorically that "inflation is always and everywhere a monetary phenomenon" without accepting the smallest modification of this understanding. In the context of what we've referred to above, that remains in my view most definitely a "rubber stamp" understanding of the oil-fiat money connection, and that misunderstanding will only grow larger as oil prices climb past $150 on their trajectory to $300..

Contemptuous
01-20-08, 03:01 PM
This is why we broke Energy and Money up into two parts. The first part is about the difficulty of separating money supply and demand from oil supply and demand. ... Hold oil demand and supply static, when M1 or MZM are in higher supply it takes more dollars to buy the gasoline than when there are fewer. Start futzing with the oil supply knob at the same time and the heavy confusion sets in. _____________

Extract from EnergyBulletin.net on the financial (inflationary?) implications of ascertained arrival of flat global petroleum production growth.

As more and more leading names in the financial world (Robert Rubin is now on board?) begin to incorporate the imminent (actually they are now already referring to this as "present") arrival of flat global production growth into their thinking, where is iTulip's extended analysis on this topic? Of note is the mention below of the effects of this realisation going "mainstream" in the financial world - in that there is a specific expectation that the mainstream business world acceptance of this event will exert a direct impulse upon the availability and the interest rate of long term loans and credit.

Why would those interest rates be biased to the upside if sharply rising economic uncertainty and inflation were not a part of the anticipated direct results of Peak "Cheap" Oil?

Where is iTulip's analysis of the financial implications - interest rates, effects on global GDP, (inflation?), etc?

_____________

About the Author:

Gail Tverberg ("Gail the Actuary") has been writing clear, knowledgeable articles on peak oil and related issues for Energy Bulletin, The Oil Drum and her own blog (http://gailtheactuary.wordpress.com/).

As her web name indicates, she is a professional actuary, having written Our finite world: Implications for actuaries (http://www.contingencies.org/mayjun07/finite.pdf) (PDF)

FULL ARTICLE HERE: http://www.energybulletin.net/39008.html

_____________

More and more people influential in financial markets will begin to recognize peak oil.

We have already seen how oil markets act differently, once the sellers of oil realize that peak oil is not far away. Sellers of oil become more aggressive and demand more favorable terms. They realize that they have leverage, and begin to use it.

In 2008, it seems likely to me that financial markets will begin to recognize peak oil as well. Leading economists are now speaking openly about peak oil. On December 15, 2007, the WSJ quoted (http://online.wsj.com/article/SB119763743685729349.html) Alan Greenspan as saying that oil supply peaked lower and sooner than had been contemplated earlier. The Toronto Star quoted (http://www.thestar.com/Business/article/290582) Jeff Rubin, chief economist of CIBC World Markets, as saying, "I just don't think we're going to see increases in conventional oil production any more. I think (peak oil) is here." With economists like Greenspan and Rubin talking openly about peak oil, it seems likely that some financial decision-makers will start thinking about the implications of peak oil for loans and other financial products. This seems especially likely if oil production remains relatively flat or declines in 2008.

Long term loans, including those for energy companies, are likely to become less available as awareness of peak oil rises.

Once financial markets begin to recognize peak oil, I expect lenders will be more wary of long-term loans, because of uncertainty that these loans will be repaid once world oil production has begun to decline. Interest rates are likely to rise. Marginal borrowers may not be able to find credit at all. All of these effects are likely to make the gridlock in loans progressively greater over time.

The Fed may attempt to lower interest rates, but as defaults grow and lenders become more aware of peak oil, the risk margin for defaults included in interest rates will tend to rise. Thus, the actual interest rates charged to consumers and businesses may not decline, even when the Fed lowers target interest rates.

I don't expect the recognition of peak oil in financial markets to be complete in 2008, especially if a credit crisis causes oil prices to drop. Once peak oil is fully recognized though (most likely when its effects are very apparent, and mitigation is clearly not working), long-term debt may become unavailable, even for governments.

____________

My Comment:

When a professional Actuary starts talking this way, you can assume the trends they are referring to are "actionable" in corporate parlance - hence on the level where large swathes of "statistical lives" are concerned , this translates into "quite deadly" for a very large number of humans. She suggests we can "bank on it".

Why are iTulip (and it's multitude of highly intelligent and informed readers) so apathetic on these issues? Do they perhaps surmise these warnings really are whimsical? This woman is a trained professional in assessing broad risk categories ... has the dazzling presumed power of Central Banks, or the power of purely "financial" events to ostensibly "determine history", completely atrophied our survival instincts?

Ms. Tverberg observes:

Increasing mortality and morbidity. In the natural sciences, researchers often talk about “overshoot.” Overshoot occurs when the population of a given type (deer, yeast, ants) grows rapidly in the presence of a limited resource, but then uses up this resource. One example is ants with a pile of sugar; another is yeast in a bottle of grape juice, which eventually becomes wine. Once the limited resource is used up, the population can’t be maintained at its high level, and rapid population decline occurs. World population has grown rapidly in the presence of fertilizers made from natural gas, irrigation from non-renewable aquifers, and inexpensive transportation to bring food to market. Once these become less available, it’s not clear that the world can maintain its current population level. Some forecast a decline to about 2 billion.

____________

rabot10
01-20-08, 06:06 PM
_____________

Extract from EnergyBulletin.net on the financial (inflationary?) implications of ascertained arrival of flat global petroleum production growth.

As more and more leading names in the financial world (Robert Rubin is now on board?) begin to incorporate the imminent (actually they are now already referring to this as "present") arrival of flat global production growth into their thinking, where is iTulip's extended analysis on this topic? Of note is the mention below of the effects of this realisation going "mainstream" in the financial world - in that there is a specific expectation that the mainstream business world acceptance of this event will exert a direct impulse upon the availability and the interest rate of long term loans and credit.

Luke stfu please
Why would those interest rates be biased to the upside if sharply rising economic uncertainty and inflation were not a part of the anticipated direct results of Peak "Cheap" Oil?

Where is iTulip's analysis of the financial implications - interest rates, effects on global GDP, (inflation?), etc?

_____________

About the Author:

Gail Tverberg ("Gail the Actuary") has been writing clear, knowledgeable articles on peak oil and related issues for Energy Bulletin, The Oil Drum and her own blog (http://gailtheactuary.wordpress.com/).

As her web name indicates, she is a professional actuary, having written Our finite world: Implications for actuaries (http://www.contingencies.org/mayjun07/finite.pdf) (PDF)

FULL ARTICLE HERE: http://www.energybulletin.net/39008.html

_____________

More and more people influential in financial markets will begin to recognize peak oil.

We have already seen how oil markets act differently, once the sellers of oil realize that peak oil is not far away. Sellers of oil become more aggressive and demand more favorable terms. They realize that they have leverage, and begin to use it.

In 2008, it seems likely to me that financial markets will begin to recognize peak oil as well. Leading economists are now speaking openly about peak oil. On December 15, 2007, the WSJ quoted (http://online.wsj.com/article/SB119763743685729349.html) Alan Greenspan as saying that oil supply peaked lower and sooner than had been contemplated earlier. The Toronto Star quoted (http://www.thestar.com/Business/article/290582) Jeff Rubin, chief economist of CIBC World Markets, as saying, "I just don't think we're going to see increases in conventional oil production any more. I think (peak oil) is here." With economists like Greenspan and Rubin talking openly about peak oil, it seems likely that some financial decision-makers will start thinking about the implications of peak oil for loans and other financial products. This seems especially likely if oil production remains relatively flat or declines in 2008.

Long term loans, including those for energy companies, are likely to become less available as awareness of peak oil rises.

Once financial markets begin to recognize peak oil, I expect lenders will be more wary of long-term loans, because of uncertainty that these loans will be repaid once world oil production has begun to decline. Interest rates are likely to rise. Marginal borrowers may not be able to find credit at all. All of these effects are likely to make the gridlock in loans progressively greater over time.

The Fed may attempt to lower interest rates, but as defaults grow and lenders become more aware of peak oil, the risk margin for defaults included in interest rates will tend to rise. Thus, the actual interest rates charged to consumers and businesses may not decline, even when the Fed lowers target interest rates.

I don't expect the recognition of peak oil in financial markets to be complete in 2008, especially if a credit crisis causes oil prices to drop. Once peak oil is fully recognized though (most likely when its effects are very apparent, and mitigation is clearly not working), long-term debt may become unavailable, even for governments.

____________

My Comment:

When a professional Actuary starts talking this way, you can assume the trends they are referring to are "actionable" in corporate parlance - hence on the level where large swathes of "statistical lives" are concerned , this translates into "quite deadly" for a very large number of humans. She suggests we can "bank on it".

Why are iTulip (and it's multitude of highly intelligent and informed readers) so apathetic on these issues? Do they perhaps surmise these warnings really are whimsical? This woman is a trained professional in assessing broad risk categories ... has the dazzling presumed power of Central Banks, or the power of purely "financial" events to ostensibly "determine history", completely atrophied our survival instincts?

Ms. Tverberg observes:

Increasing mortality and morbidity. In the natural sciences, researchers often talk about “overshoot.” Overshoot occurs when the population of a given type (deer, yeast, ants) grows rapidly in the presence of a limited resource, but then uses up this resource. One example is ants with a pile of sugar; another is yeast in a bottle of grape juice, which eventually becomes wine. Once the limited resource is used up, the population can’t be maintained at its high level, and rapid population decline occurs. World population has grown rapidly in the presence of fertilizers made from natural gas, irrigation from non-renewable aquifers, and inexpensive transportation to bring food to market. Once these become less available, it’s not clear that the world can maintain its current population level. Some forecast a decline to about 2 billion.

____________

Luke stfu please u are not EJ

c1ue
01-20-08, 07:27 PM
Actually, Lukester, you're suffering the same kind of problem the banks are:

You're thinking long, but talking short.

All of these effects you keep harping on: Peak oil, Peak food, etc etc may indeed become problems in the future.

But economic time is not the same as real time.

China started its industrialization policy in 1994.

It was not until 10 years later that the effects started impacting the world as a whole.

Even should 2005, 2006, or even 2007 be considered a 'peak oil' maximum, the ultimate effects are not going to be felt for years.

To invest with this type of time lag can be fatal - just as those Ehrlichians who bought into food companies and farm land ate s**t in the 70's.

To assume that oil and gold prices have shifted multiples in 2 or 3 years due to supply and demand issues is to betray a complete ignorance of human psychology; oil and gold are just as subject to human tendencies to extrapolate flat trends indefinitely into the future as any internet stock or home in the 'burbs.

Again, I say to you:

You may be right, but should consider if you are right for the wrong reasons.

Because being wrong but in the right place is not a long term repeatable performance...

zmas28
01-20-08, 08:43 PM
Fools go where angels fear to tread .... I am an economics neophyte, but here is my limited understanding anyway. If I am off base & don't make any sense, I would welcome enlightenment:
(1) Using the m * V = p * Q equation,
I read the left hand side (LHS) to mean liquidity ($ * velocity of $ circulation).
I read the right hand side (RHS) to mean price of goods/services * velocity of circulation of goods/services.
All else being equal, without banks generating additional liquidity, if the LHS remains the same, then one might expect the average P (the "general price level") to remain the same, ie no inflation overall measured over totality of goods and services.
However, one asset class (say oil or commodities) could go up in price level because of more dollars flowing preferentially into oil because of fundamentals, speculation or any other reason. Without "money printing", this has to be offset by reduced dollars going into something else, whose price would go down. Example, stock market. General price level would remain the same in this scenario, so no general price inflation.
If the Fed injected liquidity to support the market for example, the market might recover in nominal terms, but the net effect would be inflationary. Price of commodities and other assets might go up if the liquidity were channeled into them.
(2) Since oil and other commodities trade in global markets, this should be viewed in a global setting. Since the US is a net importer of oil, for example, I would think rising global oil prices would tend to force a rise in the general price level within the US even in the absence of Fed liquidity injection, as global dollars get channeled into the energy markets.
(3) If we enter a global recession, you would think that V would drop significantly, possibly causing P in general (possibly including oil) to drop. Of course, the Fed and other CB's would be furiously pumping m into the system.

Contemptuous
01-20-08, 10:03 PM
C1ue - I like you well enough, but I find your conceits diminish your stature. I thought they were few, but as you get dug in to your 'positions', and sound off a little bit more pugnaciously in my regard every time - I'm inclined to observe they are multiple conceits. Please note, none of my comments about Ms. Tverberg's writing were intended as assaults on you (or anyone) personally.

Why don't you try answering Ms. Tverberg's observations with something less patronising, just for starters? I mean "You're suffering from" [this, that or the other] does not exactly establish your credentials for open-minded discourse? Last time I checked, the jury was still very much in session whether the food inflation occurring worldwide right now is entirely attributable to monetary inflation? Care to prove otherwise? Are you really married to that air of "audacious self-assurance" you affect, openly suggesting that food inflation is a "non-issue" for anyone?


... the ultimate effects are not going to be felt for years. To invest with this type of time lag can be fatal - just as those Ehrlichians who bought into food companies and farm land ate s**t in the 70's ...

Quite apart from the rather coarse hint you offer up, implying I might be prone to 'eat shit' along with the "Ehrlichians" (whoever they are), you assume with plodding certainty that I'm referring to investments here.

Seems my heavy irony in referring to the "actionable" aspects of massive food inflation and it's human consequences was flying right over your head. To spell it out - I was employing irony in referring to Ms. Tverberg's observation's of the potential for mass hunger. by using the same cold blooded language which Insurance Actuaries use to reduce all their analysis to 'bankable' trends. But in fact, Ms. Tverberg's dry language and understatement is intended to show thinking and feeling people, by means of irony, that reducing a potential starvation of hundreds of millions to dry insurance assessment terms like 'actionable' or "bankable" would be merely morally deficient, and would miss the point. And that point is something to do with that archaic notion, called "ethics".

I've understood in previous dialogue with you, you are very much inspired by the 'survival' ethic. If people are smart (like you) they survive and their progeny go on to a bright future. If people are less smart (all the rest) they become the chaff and cannon fodder and you definitely espouse a 'darwinian' approach insofar as you've learned to very efficiently put your conscience to rest in the pursuit of your personal interests in the meantime. I'd love to helicopter you into the middle of one of the food riots going on in the world right now, and I'd not be very challenged to find a dozen candidate locations where you could have an interesting time of it.

Meanwhile, you write:

<< the ultimate effects are not going to be felt for years >>.

How about you testing this comfortable thesis by planting yourself in the middle of one of those (at present still fairly mild) food riots occurring in a dozen countries at the present time, and advising these people their anxiety (which apparently today already verges upon mass violence), is entirely unwarranted? Maybe distribute a few of those power bars they chew down at 24 hour fitness and tell them to "cool it"?

You seem to wish to debunk my comments on the basis that these posts constitute "lousy investment advice"? Allow me to ask what on earth prompts you to regard a discussion of the potential famine aspects of peak oil as a discussion about investments? Do you have some confusion as to what is the substantive issue here?


You're suffering the same kind of problem the banks are: You're thinking long, but talking short. --- All of these effects you keep harping on: Peak oil, Peak food, etc etc may indeed become problems in the future. --- But economic time is not the same as real time. --- Even should 2005, 2006, or even 2007 be considered a 'peak oil' maximum, the ultimate effects are not going to be felt for years. --- To invest with this type of time lag can be fatal - just as those Ehrlichians who bought into food companies and farm land ate s**t in the 70's.... What prompts you to believe that a mere decade's notice provides us the time sufficient to invent an alternative to hydrocarbon enhanced agricultural food production - to keep that production from declining, let alone growing sufficiently to meet a population moving towards 7 billion?

I find your view to be whimsical - a global problem, without precedent in hundreds of years, and you say (with a fair bit of gratuitously arrogant disdain) that people who suggest we start worrying about it now are 'foolish' because we are a decade too early?


To assume that oil and gold prices have shifted multiples in 2 or 3 years due to supply and demand issues is to betray a complete ignorance of human psychology; oil and gold are just as subject to human tendencies to extrapolate flat trends indefinitely into the future as any internet stock or home in the 'burbs ...

Do you really think I "betray a complete ignorance"? Let's at least get the attributions straight then.

I did not suggest anywhere that oil and gold prices have "shifted multiples in 2 or 3 years due to supply and demand issues". Please point out to me where I've expressly lead you to understand this was the assertion? The entire argument from the start of this thread was precisely to introduce the possibility that some (any!) component other than fiat currency inflation can exist in the price. Around here this simple and cautious assertion seems nothing short of a wildly subversive opinion - if I go by stiff necked and derisive reactions such as your own. I brought this up in a dedicated thread topic here, because I noticed that no-one on these pages has ever once made this distinction or even the slightest mention of a non-fiat component in commodity prices! How do we spell D.O.G.M.A.? Why do you suppose that is? The fiat currency inflation factor gets all the excruciatingly extended analysis, while any fundamental cost input into the price of hard assets gets not the slightest scrap of coverage?
Do you surmise then it's worth an ccasional mention, without poeple like you jumping on it and showering the topic with ridicule?

Showering ridicule while summarizing the thesis you wish to "debunk" in cartoon terms, is the flat-footed, reactive way to rebut - you set up a caricature straw man position in order to display how ably you can then knock it down, but it's an empty exercise because you engage in debunking what was never claimed in the first place. How are you going to win my admiration of your intellectual prowess in the process of doing that? You can indulge in such exercises, but you are talking to yourself, not to me.


Again, I say to you: --- You may be right, but should consider if you are right for the wrong reasons. --- Because being wrong but in the right place is not a long term repeatable performance...

Why not dump all the prancing around logic - "you can be right, but for the wrong reasons - because wrong in the right place, is not right", and descend to simpler arguments which keep both feet standing still, in one place?

There have been food riots in a number of places around the world in the past year as a result of soaring food prices C1ue. Take note of that simple fact. The largest input into food prices has to do with PETROLEUM ISSUES'. This woman was talking about the ramifications of what happens to those FOOD / PETROLEUM issues in 2-3-4-5 years if the PETROLEUM problem just gets a little bit worse.

You write: << Ehrlichians who bought into food companies and farm land ate s**t >>

I well understand the topics I raise cause your bile to rise. That's your problem, not mine. The issues are very real. Food prices are up astronomically this past year. I was talking about the food hardship. You were deriding my comments for having "no significant actionable advice". It appears you have a superb thinking apparatus, and (in my view at least) an underdeveloped "feeling apparatus" where a lot of weaker people exist, C1ue. These people very much do exist, and they are very many. How are you going to measure up in their regard? Are you even going to pay lip service to their issues - or is there something wrong with that?

jk
01-20-08, 10:13 PM
so lukester, are you 100% invested in uso [the oil tracking etf]? if not, why not? and how are you invested, then?

Contemptuous
01-20-08, 10:19 PM
For goodness sake JK - with much respect to you for your many superb contributions here (and I personally believe you are a very decent man) - but why don't you and everbody else around here understand, that it is SALUTARY every once in a while to your MORAL HEALTH, to forget your investments just for a little while and look at some human issues affecting millions, who don't have a pot to piss in, and who have a lot of uncertainty about how they'll even eat?

What the fuck is wrong with this community? Is having a broader horizon and being concerned with issues regarding the lowest segments of humanity sufficient to even just momentarily forget one's rabid pursuit of profit? Is this activity really a 'bad word' around here, perhaps denoting feeble-mindedness? Yeesh! Gimme a break! I'm serious, this kind of snout-to-the-ground obsessive pursuit of investment ideas makes me want to sick up my breakfast sometimes. I'ts enough to really turn me off this community. Is there no-one out there who will speak up for this objection?

Jim Nickerson
01-20-08, 10:34 PM
For goodness sake JK - with much respect to you for your many superb contributions here (and I personally believe you are a very decent man) - but why don't you and everbody else around here understand, that it is SALUTARY every once in a while to your MORAL HEALTH, to forget your investments just for a little while and look at some human issues affecting millions, who don't have a pot to piss in, and who have a lot of uncertainty about how they'll even eat?

What the fuck is wrong with this community? Is having a broader horizon and being concerned with issues regarding the lowest segments of humanity sufficient to even just momentarily forget one's rabid pursuit of profit? Is this activity really a 'bad word' around here, perhaps denoting feeble-mindedness? Yeesh! Gimme a break! I'm serious, this kind of snout-to-the-ground obsessive pursuit of investment ideas makes me want to sick up my breakfast sometimes. I'ts enough to really turn me off this community. Is there no-one out there who will speak up for this objection?

You could just stop showing up here. I've found when situations are unduly stressful, and too much stress seems like a really bad thing, the best solution if one has the cojones is just to get away from it. I quit working for that reason at age 50 4/12 and divorced a wife who was a inveterate liar and recalcitrant drug abuser. Why make your life hard, when you have the choice to simplify it?

Contemptuous
01-20-08, 10:36 PM
Thanks for your constructive and deeply pondered suggestion. You are a real stand out in this community Jim, insofar as you've publically endorsed mass starvation as a rational, Darwinian solution to the overpopulation problem. Congratulations on your moral fibre and breadth of humanity.

Jim Nickerson
01-20-08, 10:54 PM
Thanks for your constructive and deeply pondered suggestion. You are a real stand out in this community Jim, insofar as you've publically endorsed mass starvation as a rational, Darwinian solution to the overpopulation problem. Congratulations on your moral fibre.


That is still my position, Luke, and will be til I die. Luke, I have "pondered" your antics here for too long actually. Some while ago I found you to be causing me some stresses that I didn't want or need, so the simple answer that has worked well for me was to just quit reading "Lukester," especially those ultralong posts. I have continued sometimes to read your posts when obviously short, and I have even seen what I considered an occasional worthwhile comment in your short post.

I expect if I knew you personally, I would find you more of a pain in the ass than you appear to be here. Sorry, I feel that way. No doubt I am the only one. Finis.

Contemptuous
01-20-08, 11:38 PM
Jim, here's what I think -

I think when we all get to that heavenly place where chubby angels are plucking away at harps among the white fluffy clouds, there is a place that has been reserved for you (because you do it so well!). You will be drafted as the heavenly accounting clerk. Your job will be to sit before a heavenly Abacus and count what's in the heavenly coffers, reconciling each month's balance.

The other heavenly draftees will be doing their frolicky thing among the puffy white clouds, but you'll be seated at the accounts desk, before the big pearly white Abacus, at God's command, and you'll count, and count, and count, and count. That will be about it. Lots of time to reflect on the "counting of assets". :D

c1ue
01-21-08, 03:12 PM
As I've noted several times before:

How does being a Peak Oil and/or Peak Food person make you a better human?

Are you minimizing your oil and/or food footprint? Sending parcels to the food riot regions?

I have repeatedly noted that escalating food prices affect the poor nations disproportionately more, but I'm not exacerbating this trend by betting into it.

I have also noted that from a geo-strategic standpoint - where all commodities, actions, etc are part of the game - the US has food as a plus in the resources department.

The oil producing nations, China, and India are all able to survive on internal food, but CANNOT go up the daily prosperity scale without consuming more food.

The same applies to the Gulf nations; up until recently these countries were able to reduce internal consumption via incompetent and willfully malicious internal policies.

The genie is out of the bag, however, and their consumption of their own exported resources is going out of control. Just as Venezuela increased oil consumption 20x in only 5 years, the oil consumption in the Gulf nations will likely increase 5x or more in the same time scales. Even what has occurred already is leading to great suffering in the general populace as inflation rears its ugly head.

The US driving up the price of food is an excellent way to counterbalance the labor advantages enjoyed by these mercantile nations while subsidizing ethanol production also removes some of the edge on oil imports.

I look to Brazil as an example of a nation significantly weaned out of oil usage via ethanol subsidies; but the suffering of the poor in Brazil is still quite heavy.

Sure, Chinese and Indians can continue to eat what they consumed in the past 20 years. But that would beg the question of why they're busting their national butts when their daily lives don't change.

The point of this is that there are other factors in commodity prices than classically pure supply and demand.

Failure to recognize this can lead to great pain; this is what I mean by being right for the wrong reasons.

Should the world economic situation change - and the US no longer be as dependent on foreign labor/goods and/or oil, then were the above factors truly the driving issues - the prices of the commodities in question would collapse.

Then your inescapable facts would be shown to be in actuality, false.

That you continue to deny this possibility - is your own discredit.

Verrocchio
01-21-08, 09:13 PM
Of note is the mention below of the effects of this realisation going "mainstream" in the financial world - in that there is a specific expectation that the mainstream business world acceptance of this event will exert a direct impulse upon the availability and the interest rate of long term loans and credit.

Why would those interest rates be biased to the upside if sharply rising economic uncertainty and inflation were not a part of the anticipated direct results of Peak "Cheap" Oil?

Where is iTulip's analysis of the financial implications - interest rates, effects on global GDP, (inflation?), etc?


These are worthwhile questions, Luke, and you do us all a service to raise them. I hope that you continue to do so, but it's important that you maintain a focus on the issue that you introduced.

It's difficult enough for any of us to sort out the financial turbulence (crisis?) that we seem to have entered. If we factor in Peak Oil (or Peak Cheap Oil), along with the attendant difficulties of timing and predicted effects, understanding the economic situation that we're entering becomes overly complex. This may simply be greater than our collective ability. Nonetheless, most iTulipers would agree that PO is coming, and if we can see the outlines of what that means a little more clearly, we can begin to factor that into our thinking about our future. This is where I hope you continue to play an important role. Your focus on the issue is critical. It's obvious that you feel strongly about this issue and that leads to frustration, but if you can keep your train on the tracks, we all stand to benefit.

Contemptuous
01-21-08, 10:52 PM
Thank you for your comments Verrocchio - I very much appreciate your speaking up for the validity of these concerns.