THE Stagflation Thread (merged)

[mattduke]

it only [s]explains[/s] [s]guesses[/s] describes how it will behave.

[rogerhb]

it only [s]explains[/s] [s]guesses[/s] describes how it [s]will [/s]would have behaved if event xyz had not happened.

[MrBill]

I think you will agree that the peaking of world oil production is a physical, geological problem.
Replacing the energy lost as oil production peaks could be described as an economic problem, provided that there is:
a) a single or group of alternates that can be called upon to not just replace the lost oil but also allow for growth and
b) that deploying these alternates in significant enough quantities in the short time frame required, is feasible

If a) is proved to be false, would the economist still argue that it is an economic problem?
If b) is proved to be false, I would argue that this is no different than not having the alternate available for harvesting in the first place. Not enough energy = not enough energy and the economists dogma is that we’ll always have enough energy.

No, supply = demand works just as well when supply = 0 or is a negative number.

Zero supply = zero demand (i.e. post peak oil depletion)
Negative supply = imported supply = demand (i.e. US current account deficit funded by Chinese current accout surpluses)

When there is no more oil, there will be no more demand to burn oil. There may be a latent need for energy to replace that oil. But the oil will not be available, so it will have no price. The replacement energy, whatever it is will be

replacement supply = replacement demand

There is no law that says the replacement energy has to be as good as the original source of fossil fuels.


There is no law that says that a given level of economic output has to be sustained. That is clearly false.

Less inputs = less growth
Zero inputs = zero growth

That may be an uncomfortable truth, but do not blame it on the laws of economics.

If you have based an unsustainable lifestyle based on living off your credit cards and you lose your job, that style of living comes to an abrupt end. Zero new inputs of cash or credit = zero personal economic expansion.

If you have an economy based on an endless supply of cheap energy and you lose that source of cheap, endless energy, then that style of living comes to an abrupt end.

Just like when it is minus forty degrees outside and you are burning your fire nice and hot because your wood pile is full. Life is great until you throw that last log on the fire because once that log is gone, so is the warmth against the cold outside. That is economics. No more fuel inputs, no more fire. Supply = 0. No economist is going to build you a model that assumes that more firewood will magically appear, so if you have based your assumptions on that, it is you that is sorely mistaken!

And the pipeline is full, there is no more supply, so prices will rise and demand will have to fall, until extra capacity is magically found....

Analysts and market sources have speculated that Kinder Morgan Canada, Kinder Morgan's Canadian unit, might be able to take more crude through its 225,000 barrel-a-day TransMountain (TMX) pipeline, which runs from Edmonton, Alberta, to refineries in the Washington state, Puget Sound area. Crude can be shipped from Washington to markets in California, and Kinder Morgan currently loads about two tankers a month at its West Coast dock for Californian markets.
However, shipper demand is already greater than the pipeline can take, Kinder Morgan Canada spokesman Philippe Reicher said.
"We're actually seeing apportionment on that pipeline and there's no spare capacity," Reicher said. Apportionment is when nominations for the pipeline exceed its capacity to carry crude.
On Sunday, BP said that it would begin shutting down all production at Prudhoe Bay, the largest producing field in the U.S., after discovering severe pipeline corrosion and a small oil leak. The move will cut crude supplies by about 400,000 barrels a day, dramatically curtailing the pool of crude available to refineries on the U.S. West Coast.

Kinder Morgan Canada says it can't take more crude to West Coast

[CrudeAwakening]

But if we’re using economics to drive how we direct our lives, and these economic rules have put us through an unsustainable growth spurt, only to fall back flat on our faces, then economics, as they are currently defined and implemented, is a fatally flawed science.

Milton Friedman once famously asserted that, in economics, "assumptions don't matter". I think you can see that the scientific basis of economics would be on shaky ground if this were truly the case. To make matters worse, he claimed that it was the accuracy of the predictions that mattered, rather than the veracity of the assumptions. And economics is notoriously erratic in its ability to predict.

What you won't hear economists discuss very often, are the wobbly foundations of their subject. And an intellectual edifice built on wobbly foundations may, unsurprisingly, lead to problems.

[rogerhb]

What you won't hear economists discuss very often, are the wobbly foundations of their subject. And an intellectual edifice built on wobbly foundations may, unsurprisingly, lead to problems.

It should take it's rightful place amongst astrology, tea leaves and animal entrails.

[Shadizar]

One thing I've noticed that is conspiciously missing from this argument is the rate of money growth and how it contributes to inflation.

From doing some of my own research (including the Mogambo Guru)I've found this is probably more influencial to inflation (or deflation) than interest rate changes.

It doesn't do much good if you raise rates while simultaneously pumping enormous amounts of money into the system (like the U.S. has been doing). At least thats my take on it.

-Shadizar

[Ferretlover]

Oil in a freefall. Gold trading @ $588, also freefalling. Housing prices stagnant or falling. Haven't heard much on the stagflation front lately. I remember reading at the Daily Reckoning a couple months ago about a deflationary scenario being a real possibility about now. Is this deflationary situation any better than a hyper-inflationary reaction? Isn't the Fed much more terrified of a deflationary economy?

[Revi]

Things do seem to be cooling off really quickly. At least the price of basic commodities isn't skyrocketing out of people's ability to buy them. The price of oil has come down about 10 bucks, and the price of silver has come down off it's high of around $15 an ounce. The price of everything seems to be going down a bit. Real estate is all reduced, or has a "new price". It seems like everybody has cashed in or is waiting. It could be the beginning of a deflationary spiral. We'll see...

[strider3700]

how many people are cashing in their investments to cover their mortgages or to keep that spending spree going? Savings rates can only be negative for so long before there's nothing left to spend.

[Revi]

Sounds like oil is down for a while. It may go down to around $52 before it rebounds. Check out what Jack Chan has to say:

http://www.321energy.com/editorials/cha ... 91106.html

It seems like this is a little downturn in the energy bull market. Maybe there is some demand destruction going on. People can't afford to continue the lifestyle they have at high energy prices, so they are dipping them a bit to keep all the addicts hooked. (and voting for the pusher man in November)

[Colorado-Valley]

Ben's helicopter got grounded for a few months.

Good time to buy gold, though ...

[FoxV]

The commodities boom came from mass consumption sponsored by the housing bubble. As housing crashes, so to will commodities.

as for deflation/inflation debate my take is that the US will hyper inflate as the "exported inflation" of the last 10 years becomes imported. The rest of the world which has been feeding off of US dollars will suddenly find themselves very hungry, and will deflate.

Basically the great depression all over again except the US is the Weimer republic of the 21st Century.

As for Stagflation (price rise while incomes stay low) I think its just an unnatural state while the economy figures out what is happening next.

IMHO

[nth]

Basically the great depression all over again except the US is the Weimer republic of the 21st Century.

That is not really possible.
First, Germany owe lots of money to foreigners.
US may owe a lot, but US investors have more than enough money to cover all foreign-owned debt plus more. Another key difference is all US debt are in USD, so US investors do not have to buy foreign currency to buy these securities.
This is just the few key differences between the two. Not to mention that there are many rules, regulations, treaties, and other institutions designed to prevent this from happening.

[nth]

Just want to clarify my previous post.
I am not saying depression or stagflation won't happen, but that US is not going to be another repeat of Germany after WW1.

[Dezakin]

When commodities prices are driven by a growth in demand rather than a drop in supply, it implies there is growth happening and sort of is the opposite the definition of stagflation.

[FoxV]

US may owe a lot, but US investors have more than enough money to cover all foreign-owned debt plus more.

it'll be really interesting to see how the government would instigate that solution (Tax investors? Have you gone mad?)

However you are right, as much as I would bemoan US financial irresponsiblility, they do have a hell of a lot of money down there (although a good chuck of it in ficticious paper).

The big question would be then how would the governement get this money moving after a serious stock crash (DOW at 3000-5000) and a good round of bank and bond collapses after those ARMs show their true colours (risk)

After all this crap shakes itself out, investors will be gun shy for years to come

[rwwff]

The big question would be then how would the governement get this money moving after a serious stock crash (DOW at 3000-5000) and a good round of bank and bond collapses after those ARMs show their true colours (risk)

Velocity is everything. When those ARM's keel over, there will be lots and lots of property auctions, and they will happen lightning fast. Its one thing to take a loss and grumble; its another thing to be on the hook for taxes and insurance on a property you can't figure out how to profitably rent.

Fed could slip a little liquidity genie into the mix just to make sure nothing stalls out to bad.

[jaws]

The capital goods market is crashing.

[nth]

it'll be really interesting to see how the government would instigate that solution (Tax investors? Have you gone mad?)

Umm... I never said anything about US paying back their debt. I said US investors will buy the bonds from Foreign owners. Since the debt is USD, US investors will not need to buy foreign currencies. THAT is a huge plus and prevents the economy from collapsing when debts are called. Germany was not so lucky, so they had to pay by printing it in huge quantities.

However you are right, as much as I would bemoan US financial irresponsiblility, they do have a hell of a lot of money down there (although a good chuck of it in ficticious paper).

It is practically ALL in paper. The actual non paper assets are minuscule.

The big question would be then how would the governement get this money moving after a serious stock crash (DOW at 3000-5000) and a good round of bank and bond collapses after those ARMs show their true colours (risk)

After all this crap shakes itself out, investors will be gun shy for years to come

After 1929 stock crash, US has been pretty good at manageing stock crashes. Stock crash in itself is not that bad, but what it can lead is what is dangerous. Depending on what cause this future crash, US may or may not be able to handle it.

Mortgage collapse has been experienced before. US seems to survive those quite well. When you analyze these things, you will find that no one issue will cause economic collapse, but when several happen at once, then it becomes the perfect storm.

[FoxV]

After 1929 stock crash, US has been pretty good at manageing stock crashes. Stock crash in itself is not that bad, but what it can lead is what is dangerous. Depending on what cause this future crash, US may or may not be able to handle it

during the depression, the US had less debt (governement and private) and was not able to pull out of the depression.

How can it do so now with even more liabilities than the 1930's. I understand how investors can buy rapidly selling bonds to keep the dollar up. However this is akin to taking a punch in the face to keep everyone else from getting hurt. Not a big deal if its thousands of investors tak one punch each, but if only a few investors stand up to take the punches they're not going to look too pretty afterwards ("catching a falling knife" I believe is the term used these days).

As for a perfect storm, there's a lot of clouds out there. Ultimately I'm not trying to be critical. I am legitimately interested in learning how the US will manage to bail themselves out of this one.

I feel the next bail out will be the last boom we'll have this century so I'd like to get set up for it as much as possible (if it is possible to predict anything at this point)