The Case for Inflation from a Plateauing Supply

This is a guest post from Jeff Vail.

Will Peak Oil lead to inflation, deflation, or some variant thereof? I don’t claim to know the answer—in fact, I’d argue that anyone who "knows" the answer is discussing theology, not economics. My hope here is to present a case for Peak Oil resulting in inflation, and to spark a centralized debate on the topic. Allow me one courtesy: for the purposes of this discussion, assume that we are not able to sufficiently mitigate the effects of Peak Oil through conservation, efficiency, or alternative energy sources. Assume that Peak Oil will have significant, negative economic effects—the issue that we are discussing here is whether those negative effects will be inflationary or deflationary. I will focus my discussion on effects on the United States, but thoughts on the inflation/deflation debate outside the US are certainly welcome.

A quick review, so that we are all comparing apples to apples.

Inflation is the decrease in purchasing power of a currency due to an expansion in the supply of that currency ('printing money') and the interest rate offered by that currency's central bank. Personally, I subscribe to the Austrian theory that interest rates are a function of global economic growth and currency-specific money supply, allowing markets, not central bankers, to play the key role in rate setting.

Deflation is the opposite of inflation and is an increase in the purchasing power of a currency. There are several theories about the cause of deflation, but there is general agreement that it is caused by the combination of a reduction in money supply and a slowing of consumer spending (because this reduces the velocity of money in the economy).

Central Banking, and Measures of Money Supply

To what extent do central bankersin the US, the Federal Reserve Bankhave the power to decide between inflation and deflation? This balancing act is the central problem of central banking. Central bankers have three critical tools in their tool belt: interest rate setting, and setting of reserve requirements, and open market operations.

Interest Rate Setting: The Fed sets the benchmark Fed Funds Rate, which governs the rate at which banks lend—via balances with the Fed—to other banks overnight. While this is the most visible of the Fed’s functions, it is possibly the least important. Ultimately, the price of money (the interest rate) is set on the markets, such as through bond trading at the CBOT, and is based on supply and demand. If the Fed sets a rate that is too far off the market rate, it is essentially subsidizing lenders (though, as explained below, they can set that market rate through open market operations).

Reserve Requirements: The Fed also sets reserve requirements for banks—how much they must keep in liquid assets to cover loans that they have made. For example, if a bank has $100 million dollars, and the Fed has a 10% reserve requirement, then that bank can (via fractional reserve banking covered by overnight loans at the Fed Funds Rate) generate loans of $1 billion dollars. If the Fed changes the reserve requirement to 5%, then that same bank can now make $2 billion in loans—this increases the money supply, and represents an inflationary pressure.

Open Market Operations: This is, in my opinion, the most important and most hidden tool in the central banker’s tool belt. The Fed engages in open market operations by buying and selling their own securities (T-Bills, T-Notes, etc.). When the Fed sells these securities, they are decreasing the money supply because the private party purchasing the security must give the Fed money now in exchange for a note that will pay them money at some future date. Conversely, when they buy back their own securities, they are increasing the money supply because they are providing money today to buy back a note that only obligated them to future payment. This is the actual mechanism by which the Fed "prints money." There is virtually no limit to the amount the fed can increase or decrease the money supply (there is a theoretical limit to their ability to increase the money supply because they can only buy back all securities currently in circulation, but this isn’t much of a limitation), but significant buying or selling of securities will also have a significant impact on their price—essentially the rate of return that the Fed must pay on these debt instruments. Finally, the Fed can get around the theoretical limit of how much they can increase the money supply buy selling higher numbers of very short term T-bills, for which the market will only absorb at an increase in the rate of return—even though this decreases the money supply until the maturity of the T-bills, it has the ultimate effect of increasing the money supply after their maturity.

In addition, central banks such as the Federal Reserve often decide how to report issues related to central banking. Money supply is, in the US, measured by the Federal Reserve. Historically, they provided three measurements of money supply: M1, M2, and M3 (definitions of these measures here). They recently discontinued reporting the M3—something that I see as an ominous portent signaling the intention to discretely "inflate away our problems."

Before I lay out my argument for why the Federal Reserve will choose to pursue an inflationary policy in response to Peak Oil, I’d like to outline three specific areas in which the inflation vs. deflation decision will have significant ramifications:

1. The Elephant in the Room: Entitlements

What "environmental" factors will influence the central bank’s decision to pursue either inflationary or deflationary policies? In my opinion, the elephant in the room—in both the US and internationally—is our huge set of entitlement commitments and debt obligations. Our entitlement commitments include corporate commitments to pensions (and their government backing when corporations default), and government commitments to social security payments—both especially salient given the wave of "Baby-Boomers" expecting to be able to retire in the near future. In 2004, $492 Billion was paid in Social Security benefits. In 2010, the first of the 'baby boom' generation, 76 million Americans, will turn 65, and that number will likely skyrocket. Corporate pension obligations will similarly go through the roof—they are already bankrupting America’s car companies, for example—and the likely defaults will increase the burden on the government to pay pensions thanks to our Pension Benefit Guarantee Corporation.

2. Debt Obligations

Our debt obligations are massive, and are held in significant quantities by both domestic and international investors (including nation-states such as China). The U.S. Federal Debt is currently about $8.5 trillion dollars, 44% of which is held by foreign entities, mostly (64% of that 44%) foreign states. Inflationary policies will have the impact of reducing the value of our debt obligations, whereas deflationary policies will increase the value of these debts.

3. The Petrodollar System

In addition, inflationary or deflationary policies may have significant impacts on the durability of the existing petrodollar system. If the US petrodollar system stays in effect through the effects of Peak Oil, it may mitigate the financial impact with regards to the United States to some degree by passing this burden to other, oil consuming nations. However, for exactly that reason, I see it as likely that the petrodollar system will gradually erode over the next decade or so. I’m no expert in this area, and a huge amount has already been written on this topic. The erosion of the petrodollar system, though, would likely exacerbate the tendency towards inflation of the US Dollar. The reason for this is that, if the value of a currency is the result of the supply and demand of that currency, then the erosion of the petrodollar system would reduce the demand for dollars, reducing the relative price (value) of those dollars.

The Argument for Inflation

In my opinion, it seems most likely that the US Federal Reserve will pursue a policy of inflation in response to Peak Oil. It is my opinion that central banks can choose between inflation or deflation—though not necessarily the relative magnitude of their choice. That is, the central bank may only be able to choose to create either hyper-inflation or mild deflation. The reason that the Fed has the power to choose either inflation or deflation is because they have theoretically unlimited power to increase or decrease the money supply through open market operations—no matter which way the economy is naturally trending, the Fed can force an inflationary or deflationary environment, though at the extremes these actions will have severe, long-term drawbacks. Given this power to choose, it is my opinion that the US will choose inflation, even hyper-inflation, over deflation, even if that deflation would be relatively mild. There are five reasons why I think that this will be the case:

First, the Federal Reserve will want to maintain at least a modicum of control, and most monetary policy tools at their disposal do not function well, if at all, in a deflationary environment. For example, the bank cannot set interest rates below 0% (well, without giving away money...), and yet a 0% interest rate may not be sufficiently low to expand the money supply to slow or reverse a deflationary spiral.

Second, it is my opinion that our massive entitlement and debt obligations make inflation more attractive than deflation, as they have the effect of diminishing those obligations.

Third, and closely related, is the psychological impact. Inflation can easily be masked by a non-representative Consumer Price Index (CPI), as I think is currently occurring—the CPI does not include many housing, health care, education, or energy costs. As real inflation gradually erodes the purchasing power of fixed wages and incomes, people will only slowly perceive the damage.

Fourth, and also related, is the short-term nature of our political decision making process. During the relatively benign economic conditions in the US over the past 20 years, with only mild recessions, it has been possible for the Federal Reserve to act with a high degree of independence from politicians. However, I think that under more severe economic hardship, political forces will exert a great deal of influence over the Fed. With that said, I think that the very short term nature of our political system—with a two to four year time horizon—we will opt for the short term relief of inflation from our debt and entitlement obligations despite the long term pain that inflation will cause.

Fifth, I think that the popular view of history favors inflation over deflation. The Great Depression was a deflationary spiral, and is the benchmark within the American experience for true economic hard times. In comparison, the inflation of the '70s and '80s seems mild. While that comparison may not be valid in reality, I think that it carries great weight in our national psyche. Given the choice, I think that the Fed (especially under increasing political pressure) will do anything to avoid comparisons with the deflationary events surrounding the Great Depression.

Of course, given that I think the negative economic effect of Peak Oil will be severe, it might be more accurate to characterize this inflation as "stagflation", which is inflation combined with recession (or depression).

Finally, what will about the timing of inflation in response to Peak Oil? This, I think, is one question that is simply to complex to answer satisfactorily. The timing of the decline of the petrodollar system, the timing and speed of the decline in global oil production, and countless other economic factors all come into play. In the end, though, I do not think that the timing issue prevents forming an opinion on the general direction: inflation or deflation? I think that the evidence weighs clearly in favor of an inflationary future.

As a final disclaimer: I am not a central banker. I studied economics and finance in my undergraduate education, as a component of a doctoral program, and as a student at the American Institute for Political and Economic Systems in Europe. I think this debate is incredibly important and interesting, both from a financial mitigation perspective as well as for personal preparations. That said, my goal here is to learn about this issue, not to prove that I am right. Let the debate begin!

The tanker rates in the Persian Gulf have been falling for eleven days with an adequate supply of tankers for the amount of oil that must be loaded. That is deflationary.

On the other hand the price of crude was up a dollar this morning. That is inflationary.

Part of inflation is by will of government decision. Whether or not a government can balance its budget. The cost of borrowing money. The amount of money in circulation. The amount of money the Fed requires banks to keep on deposit to cover for bad loans, private depositors needs to withdraw funds, etc.

Shortages of gasoline resulting in price spikes in gasoline might cause the price index to rise, even though the price of tanker transport might be falling.

Typically nations experienced more inflation during times of war than times of peace.

Remember: Price increases are not inflation. An increase in the money supply is inflation. When there is no increase in the money supply and the price for oil increases, the price of something else (say, SUV's) will fall. We have never experienced a constant money supply so we do not know deflation. But deflation was present thorughout the 18th and 19th centuries, in those periods when the money supply (ie gold) was not increasing faster than the world population and economy. South Africa, California, and Australia all sparked some bouts of "inflation" separate from the wars.

You beat me to it. The price of oil going up in not in itself inflation. The price of computers going down is not deflation.

That said, I agree with JV's conclusion though maybe not for the all of the same reasons. The elite can escape the devastation of inflation through posession of hard assets, though they may be threatened ultimately by the ensuing consequences. The accumulated debts to pensioners cannot be openly repudiated on a sufficient scale: they must be inflated away.

It's hard to see any power bloc benefitting from deflation. Theoretically, deflation benefits bondholders. But deflation would render debts owed uncollectible. The housing meltdown is already showing that, and we see this in already mildly inflationary times (compared with what's to be). Deflation here would cause revolution in China whose factories would idle.

The biggest thing, of course, is the military and intelligence machine. This is what undergirds tha value of the dollar now. This is what allows one to hope that the dollar, which is not backed by anything else, is at least backed by oil, theirs, oops, I mean ours. It must be fed, and can only be fed with inflated dollars. And if it isn't fed, then the sole backing disappears and we are back to the Weimar days. The elites all over the world fear the dam's breaking which is why they all appease a regime they detest. These guys have the world by the pashwingi -- for now.

Actually I see inflation as more harmful to the "elite" than to ordinary people. Inflation primarily benefits debtors, by allowing them to repay their debts with cheaper money than they borrowed. As a general rule, the wealthy loan money to the poor, rather than the other way around. Therefore inflation will benefit the proletariat at the expense of the elite.

"Theoretically" you are right. They lend. But with an implosion they don't get paid back at all. People are already going into default. Deflation would mean economic implosion -- far more would default.

Next, the elite lends, but not their own money. They lend the middle class's money, their pensions, college savings, etc. You don't get into the elite lending your own money -- no, no, no.

Therefore the elite borrows, borrows from us. Now I said the proletariat goes into default. But not like the elite goes into default. The elite goes into default by eliminating our pensions, by running up massive govrnmental debts that will be the excuse for tearing up all contracts with the common folk. The only contracts that aren't torn up are the tax reductions for the very wealthy. The military-industrial complex doesn't need a contract -- it's implied.

The elite can play the world's assets, unlike you and me. That's what globalization is really all about -- not trade so much as free movement of capital. That, by the way, is why the Soviet empire crumbled peacefully. The Soviet elite could not walk away from their rust belt -- it wasn't capital. They envied the Western elites. They thought they would be better off with capital. That they were outmaneuvered is another story.

This is a fascinating thread, but perhaps we should simplify it and take it a step further?

Since there is wisdom in the collective, why not do a simple poll?

"Do you think PO will result in"

a) high inflation/stagflation
b) little meaningful change
c) deflation

d) total chaos


I don't quite see it as debtors vs creditors, but more as the prudent vs imprudent. For example, the creditors and debtors in the New Century collapse are very much on the same team when it comes to pressure for a Federal bailout.

The irony of all this is that that the majority of TOD members seem to believe that an inflationary scenario is the most likely outcome. Well, that means that when the credit meltdown comes, those with debt are going to be bailed out by those without debt. which case all those following Westexas' ELP maxim are going to get a big fat bill demanding that they pay for the financial recklessness and profligacy of others.

Not a comforting thought.

But...but... then the already slave-level wages of the poor person become worth even less. Wages of the lower percentages of the working poor have declined in recent decades. The rungs keep coming off the ladder.

Yours is the most common, and in my opinion, the most erroneous view of inflation. A change in the price of a good due to scarcity is NOT inflation. It is simply the market adjusting to the supply of the commodity on hand at a given time. The only thing that can cause inflation is the printing of more money than there are goods and services for that. Then there are more dollars chasing the same amounts of goods and services.

Personally, I do not accept your definition of inflation at all. I doubt that Jeff will either based upon his article.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

I second what GreyZone pointed out: increase in the relative price of oil due to a new supply/demand equillibrium is a change in price. Decrease in the overall purchasing power of a dollar because the money supply is increasing faster than the quantity of goods and services being purchased is inflation. The issue here is not whether or not the relative price of oil will increase, but rather how central banks will react to the resultant negative economic effects by implementing a broader inflationary policy.

Jeff, I really wish you had described the two definitions of inflation in common use in your post. We're bound to have dozens of posts simply arguing about the definition of inflation. I know it ticks off Austrian school followers, but most people do not agree with the Austrian school definition of inflation. This almost always devolves into a shouting match between the two definitions because people don't specify which definition they're using.

The Austrian school definition isn't "right" and the general level of price definition isn't "right". They are two definitions that are considered equally valid by their different adherents.

Did you bother to read Jeff's article? He stated his definition of inflation and his classical leanings at the very beginning! He doesn't have to repeat it 55 times because someone refused to read.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

Of course I did. He didn't acknowledge that there are two definitions of inflation and that he was using the less common, but maybe more rigorous, definition. His statement was also a bit ambiguous as to whether he was using the Austrian School definition of inflation or the Austrian School theory of interest rates. If *you* read his statement, you'll see that he referred to the Austrian School WRT interest rates, but didn't indicate that WRT his definition of inflation.

You have to realize that the Austrian definition of inflation is *not* the common accepted definition. Look up the Wikipedia definition of inflation and you'll see this. That *certainly* doesn't mean that the Austrian School definition is wrong, but when you're using an uncommon definition of a commonly understood word, you're better off acknowledging the discrepancy up front and making it clear you're using the less common version.

Whether he labeled it or not, he clearly stated his definition.

Inflation is the decrease in purchasing power of a currency due to an expansion in the supply of that currency ('printing money') and the interest rate offered by that currency's central bank.

How much clearer does he need to be? Is this like "depletion", which many around here confuse with "decline" but which is actually what happens from the time the first drop comes out of an oil well? Do we expect the readers of this site to be conversant with the word depletion and what it really means or the commonly accepted (and incorrect) version?

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

(Comment deleted, I was confused.)

I think it's a little more complicated.

It is sort of an axiom of accounting that this kind of 'inflation' has to occur by printing of money and therefore there is some kind of "conservation of inflation" if money supply (and money velocity) is held fixed.

But let's look specifically at the actors involved. What happens when the price of oil goes up and the money stays fixed.

People who have to buy things made or transported with oil (i.e. nearly everybody) have less buying power, simulating "pure" monetary inflation.


The people who produce oil (Mideast Potenates) have a massive increase in their buying power, simulating monetary deflation.

Of course you can say that this applies to many other goods and services and it is certainly true, but in almost everything else, there is a complex web of interdependencies and we don't see the internal price and income fluctuations as 'inflation', just fluctuations.

It is the specific physical nature of oil that results in such a low-order "collective" effect on nearly all of the non-oil-producing economy that it simulates, for all useful purposes, something that is almost like true inflation from all observable quantities except Dubai bank accounts.

The effect of oil scarcity is simple: transfer of wealth and capital from oil consuming people and nations to oil owning nations. If these oil producers are predominantly out of the country then the effect on your own country is nothing but a broad decline of purchasing power, simulating inflation (in prices) but without concomitant inflation in income.

Hi Greyzone,

I haven't thought this through completely yet but...

While scarcity of a good is not the same as 'printing ' more dollars, with a good like oil and natural gas, the number of dollars chasing this product would increase producing a deflationary reaction in other parts of the economy, but only on a temporary basis. If the money supply remained constant the economy would re-balance but on a lower level.

Imagine taking a sip from a glass of wine -- the gradient would gradually, if no other action taken, return to normal when the glass returned to the table, but at a lower level, this in what might be considered organic bottoms up induced inflation rather than Treasury top down.

I won't labour this further other than to say that I don't think we can view oil as other products. Other products are seeming in this discussion being considered as replaceable, oil isn't.

BTW thanks for the welcomed and appropriate follow up on mine of yesterday.

In the last few weeks a word that I haven't seen for decades: "Stagflation" has been cropping up in the press. Originally coined in the 1970's in response to the oil shocks of that time, the symptoms were economies showing little or no growth, but high inflation and high interest rates.

Probably the underlying cause was the impact of high oil prices working through economies (cost push inflation) leading to escalating prices. Money supply was under government control in many countries then; and governments in response tried to muddle their way through by allowing the money supply to grow in order to mainatain as much economic activity as possible.

Thatcher and Reagan then began "so called supply side" economics and the "miracle" of Thatcherism that supposedly corrected what were perceived as structural imbalances in the major economies.

Of course it was just then that Prudhoe Bay and the North Sea came on stream and the west was able to undo much of OPEC's power to control the oil price. Then we had years of $10 oil and the rest is history, so they say.

Now, oil as a proportion of the global economy is smaller, and thus the impact has been slower to manifest itself. However recent higher prices are working their way through economies. The corn ethanol fiasco in the US is driving up food prices even further. Add to that wall to wall debt in all sectors of the US economy and one begins to appreciate the tightrope the Fed is walking. Hence articles such as this debating whether infalation or deflation is the problem. Stagflation.

It is only a matter of time before the fundamentals take over. They cannot be helf off for much longer.....surely?

Stagflation won't be repeated due to the global economy that we have now, that we didn't have in the 1970's.Back then, wages grew quite abit even though the economy was sytematically hollowed out and turned from manufacturing based to services based. Now, we have a global economy that will only continue to accelerate and theferfore severely limit wage growth. And don't believe that it is all based on jet fuel. The internet has opened up vast frontiers for outsourcing.

So then without wage growth, prices will have to be limited or even collapse as we are starting to see in the housing market.

Nice post.

I just got off the phone with my girlfriend, and she mentioned that her friend at work showed her an article in the New York Times about stagflation today. She had never heard of it before. (We are both in our 30's)

I think it will be like the 70's. Stagnant wages. Inflation in energy and food. CAFE standards will be raised. Conservation will be preached. Wars will be abandoned. Eventually high interest rates will be imposed, and a new wave of cheaper energy will be unleashed on the world. If I had to guess I would say solar, nuclear, and wind will eventually drive down electricity costs, and transportation will go electric. This will probably take the better part of a decade.

So where do you put your money?

I think Energy companies will do well. I expect that earnings from high oil prices will be invested in alternatives. Other companies might just start paying a high dividend.

Gold and silver are a good hedge.

Real Estate probably needs a decade to wipe out the excesses of the last 6 years. That being said, you gotta live somewhere, so those people who have a 30 year fixed mortgage (and can continue to make the payments) will do well in the end.

Toyota seems like a good bet.

Dividend producing stocks.

Land near Railroad stations.

Investment in conservation strategies in your own home (insulation and high efficiency systems) should pay off really well.

Whatever you invest in - just remember to diversify.

I was just a baby in the 70's, so I'm sure I have no idea just how bad it's going to be. Hopefully I can hang onto my job and ride it out.


Inflation is MONETARY phenomenon. Therefore, neither PO nor anything else must necessarily have any effect on monetary conditions.

Even if oil was $1000 a barrel, in "today's dollars", that would not be inflationary. It would merely be very expensive oil. House prices have also gone up 4x or so during the past ten years. Why isn't that inflationary? Or the cost of medical care?

Now, that said, there is some inflation here, as evidenced by the highest dollar/gold prices in 25 years, and it looks like it will become more intense. Thus, we will likely have inflation and higher real oil prices together.

I've written many thousands of words about this stuff at my site

Of course it is a monetary phenomenon but Jeff's scenario is actually asking what monetary policies will the fed take given the external stimulus of peak oil? And I still think inflation is going to be their primary and initial response.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

I agree that peak oil is likely to be inflationary, particularly to the US.
The very last tool in the US tool box for maintaining our non-negotiable life style is our most valuable commodity: the trust that we will manage the world's reserve currency properly. No one wants to see the dollar collapse, and it looks to me like the Japanese, Europeans, and Chinese are all increasing their money supplies in step with the US.
The result of this initially is that the poorer countries, without exportable resources, cannot bid with us for the world's remaining reserves-- the first part of demand destruction.
The real test will be when exporters have to choose between taking Euros, Dollars, or Renmimbi for their oil. Right now, they can exchange dollars for everything. But when China says that you can only pay for Chinese products in Renmimbi, then the US is in trouble.


I happen to agree that the financial institutions will respond to any such crisis via inflationary policy. However, there are areas, such as those mentioned by Jeffrey Brown and others where deflation is occurring and will continue to occur. These areas are primarily areas where real property is actually losing value due to the changes in our society caused by peak oil, such as suburban real estate, vehicles, etc.

Also, as you note, the Great Depression was deflationary and the Fed has several times indicated that it wants to avoid that again at all costs. As for "stagflation", I believe we are already there. The CPI is not useful any longer for evaluating anything. As John Williams (author of has said previously, inflation is currently at least twice what is reported based on standards for reporting inflation as recent as the Clinton administration and even higher if we compare it back to the 1970s. Also, Mr. Williams says that the indicators, when unwound from government manipulation of the data, clearly show the economy is in a currently gentle contraction. So the recession is here and the inflation is here. Please note that multiple independent reconstructions of M3, which have been back tested against the existing M3 data and shown to be extraordinarily reliable, currently indicate the money supply is growing at close to 11%.

Finally, the petrodollar system demands inflation. Inflation is the imperial tax that the US levies on the rest of the world. So long as the tax rate is not too high, the rest of the world has appeared to largely accept this for their own benefit. However, in recent years the equation is changing with the imperial US now directly militarily intervening in multiple nations and heavily increasing the imperial global tax rate.

I don't see how anyone can argue that the Fed can do anything other than inflate given the choices available and the circumstances. The ultimate end may still be a deflationary crash but it won't occur til after the inflationary card has been played completely out.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

I concur - stagflation.

And perhaps something we have yet to envisage i.e. hyper-stagflation.

I agree, I think stagflation is the most likely. As GreyZone pointed out, the inflationary tools of a central bank may not work forever, and the ultimate result may be deflationary. However, so long as the global markets function and central banks can work within them, I think they will respond with inflation. At some point, if one assumes a hard crash scenario, I think that fiat money and the world markets in general fall apart, after which the resulting barter or commodity-backed currency could well be deflationary.

We really don't have to look much farther than the Fed minutes released yesterday:

The information reviewed at the March meeting indicated that the economy appeared to be expanding at a modest pace in the first quarter. Declines in residential construction activity continued to weigh on overall activity, and business investment had softened considerably over the preceding several months, especially in equipment used in the construction and motor vehicle industries. However, consumer spending had increased appreciably in the early part of the year, and labor demand continued to expand, albeit at a somewhat slower pace than last year. Meanwhile, the twelve-month increase in core consumer prices remained elevated relative to its pace one year earlier.

The fed already knows they're in a bind. They've been increasing the money supply for quite a while now. The problem with the common definition of inflation is that, as you noted, it allows the Commerce Department to manipulate the definition of inflation to pretend it isn't happening. The problem they're going to have is that as the dollar devalues against other currencies and as the housing bubble bursts, sending more people into rentals, the homeowner imputed rent portion of the CPI is going to push the core price index up. People will figure out that we're experiencing inflation by any definition - we've been dealing with inflation using the Austrian school definition for so long that it's pretty much inevitable.

inflation is currently at least twice what is reported

This notion of systemically under-reported CPI over decades is very popular right now. It doesn't explain how over those decades the percentage of personal income devoted to discretionary spending (including entertainment, eating out, travel, etc) keeps rising. People simply have more to spend on stuff, and it shows. The CPI conspiracy seems to fall apart under this argument. Can you explain this?

P.S. I'm not intending to pick on you by my disagreeing on two different subjects in this thread. :-)

Here's my two cents on the matter:

1. People have more credit today. That doesn't mean that they're more creditworthy, but that new credit instruments have given people more access to credit for a given level of "creditworthyness." As long as this access to credit is accellerating, it diminishes the perception of inflation because there is, as you pointed out, more disposable income and thereby more discretionary spending--but it's a ponzi scheme, and when the credit expansion ends (as it may already have), the debt is still there--which will further drive the decision to inflate.

2. Over the past 50 years, it is my impression (no hard data at my fingertips...) that people have monetarized their free-time, among other things, trading it for more money by working longer. This has allowed discretionary spending to keep up with, roughly, inflation. But it can only go so far--most people with jobs already work more than 40 hours per week, unemployment is near the structural level, and there aren't many more "stay-at-home moms" who can enter the work force--they have already done so in the quest of increasing discretionary spending. We have met the point of diminishing marginal returns here some time ago, IMO, and inflation will now begin to outpace the increase in discretionary income within the narrow prespective of this factor.

The CPI doesn't include energy, housing, health care, education--these are things that globalization has done a very poor job of in terms of providing them more cheaply. CPI tends to include those thing which our modern economy has been efficient at providing for more and more efficiently (broad generalization). *IF* we temporarily define inflation as an index of consumer prices, why are are we ignoring half the prices that consumer pay??

#1 I think its fairly obvious that credit is going to be less and less available as the housing bubble unwinds. We have already begun to see the subprime market implode and this is very likely to spread to prime lending as well.

#2 I don't think that there are any "stay at home moms" today that can pull this off in most areas unless they are really making a sacrifice economically. Most families require 2+ incomes just to maintain lifestyles that they had in the past and much less quality of living than their parents had. Don't bother mentioning the trinkets like flat screens, I'm talking food, housing and medical care which have been and are at the limits of affordability lately.

#3 The CPI is just a governement number and is not reality based. I don't know anyone who takes it seriously unless they are in front of an MSM mic or camera.

#4 With all of this economic stress, do you expect it to just continue?

happy trails...


The CPI doesn't include energy, housing, health care, education

First, the CPI does include energy (part of transportation costs), housing, medical care, and education -- as well as, food, apparel, recreation, and services.

Second, people have increased their debt, but so far, the assets of the country have increased faster than the debt.

That being said, it seems to me that during our largely agrarian past, husband and wife worked very hard to make ends meet. Then during the US industrial boom there was a brief time when a single suburban male with little education could provide for a nuclear family with one job. Later, the wife was added back to the payroll to increase household disposable income.

Industrial productivity then improved to the point that lesser educated people cannot get high paying manufacturing jobs -- more education is needed to get increased income now. For instance companies frequent complaint these days is their widespread inability to find qualified people.

Economic observers seem to think that everything should be measured against that brief industrial period when the average Joe could get a high paying factory job and keep Suzie at home with the babies. I don't think the problem is really with the CPI so much. It a perception thing.

The June Cleaver fantasy was just that, a fantasy. Even in the '50s, many - perhaps most - women worked outside the home. My grandmothers both did.

But now, we really are working longer hours to maintain our lifestyles.

And not only are we more in debt, via credit cards and home equity loans...we are not saving as we used to.

I've even seen personal finance articles that recommend using credit cards as your emergency fallback, instead of saving up an emergency fund.

This book says "myth is rooted in fact" and "Affluence had become almost a right; the middle class was growing. In fact, writes Coontz, the 'traditional' family of the 1950s was a qualitatively new phenomenon.'" So it seems to argue in favor of what I have written.

But what about making up for "invisible" inflation via longer working hours, less savings, and more debt?

That gets back to my point about a CPI-independent way of looking at the problem. If households (that's the way economists have measured this) have a rising percentage of income to spend on "discretionary" items then that means they are spending less percentage on housing, food, medical, etc. Looked at this way, inflation is invisible because it's not really there.

The detail behind this line of argument is that "big ticket items" like autos and appliances have trailed income gains and therefore created more discretionary spending. People tend to focus on the everyday items where prices are going up and tend to overlook the infrequent "big ticket" purchases that appear to more than make up for the increased costs elsewhere.

As to the debt/savings issue, it appears that return on investment has beat the cost of debt. So US assets have risen faster than the debt. Is that bad?

Its just a perpetuation of the myth that everything is getting worse than some mythical time in the past. If you squint you can see it, but only if you stand in just the right place.

. If households (that's the way economists have measured this) have a rising percentage of income to spend on "discretionary" items then that means they are spending less percentage on housing, food, medical, etc. Looked at this way, inflation is invisible because it's not really there.

Not if the spending came is coming at the expense of increased debt and decreased savings.

I think is something that will be important. The '70s oil crisis hit when households saved a lot more than they do now. They had more of a cushion.

Yes, some people are making a lot of money off their "investments" now. But the gap between the haves and the have-nots is widening. Many Americans don't have any investments to get returns off of.

Economic observers seem to think that everything should be measured against that brief industrial period when the average Joe could get a high paying factory job and keep Suzie at home with the babies. I don't think the problem is really with the CPI so much. It a perception thing.

Very good point about the rose-colored historical reference. The United States emerged from World War II largely unscathed compared to Europe and Asia and in a position of unprecedented economic dominance, with 40% of global productive capacity and 80% of the world's gold. The idea that the 50s should be a benchmark against which other eras are measured is what Beaver Cleaver would call silly.

We had stagflation in the 70s because it was basically the only way we could put to work all the boomer graduates pouring out of colleges with their highly elevated economic expectations. And, as Leanan points out (maybe lower in this subthread), it wasn't a bad solution because the nation could well afford it. The boomers were young, and debt levels relative to GDP were very manageable. Stagflation actually made the country - very briefly - more egalitarian, effectively transferring wealth from Old Money to middle-class homeowners. The switch from a gold-backed currency to an oil-backed currency in 1971 was a very deft maneuver as well, allowing us to preserve dollar hegemony for nearly four more decades.

But as the rest of the world re-industrialized, creating global wage competition at more or less the same time we ceased to be energy self-sufficient, we shifted from creating income-based wealth to the debt-driven asset-based illusion of it, borrowing more and more heavily against the assets whose value we had inflated in the 70s.

Now comes the next great demographic shock to the economy as the boomer retire, and the situation is very different, really the worst of the excesses of the 70s and the 20s. The ratio of debt to GDP is 3.5 - much higher than in the 2.9 in 1929. A third of workers 45 and up have saved less than $25,000, and home equity as a percentage of market value has declined from nearly 70% in the early 80s to less than 55% recently. (Then there is the issue of who is going to buy the boomers' empty-nest McMansions. There are 15 million fewer Gen Xers behind them - even if they could afford to buy the places and keep the lights on.)

But inflation well beyond what is being reported in the CPI is anything but a perception thing. The BLS since the 1990s has manipulated the CPI to minimize the financial impact of cost-of-living adjustments embedded in Social Security benefits. The Orwellian deployment of hedonics deducts the "pleasure" associated with product improvements from their price increases. And the BLS's bizarre imputed rent model muted the reported inflation rate even as home prices were soaring beyond the reach all but the wealthiest or most credit foolhardy Americans. As somebody over at Minyanville aptly put it, we have deflation in things we want - HDTVS, laptops - and inflation in the things we need - food, transportation, housing and healthcare.

Pour a little peak-oil pain into this mix, and you have the makings for real catastrophe: dollar collapse and imploding property values coupled soaring food and energy prices, interest rates and bankruptcies.

One quibble...

debt-driven asset-based illusion

You seem to be referring to the post-70s period as a whole. The data seems to show that the ratio of household debts to assets grew from 7% to 12% in the period 1952 to 1965, then remained basically flat between 12% and 14% from 1965 to 2000 (35 years), and only in the years since then has gone to 19%.

This doesn't modify the current situation, just paints a different path on how we got here.


Could you please provide a reference/link for your time series data on Debt:GDP?


What the Fed would do is almost irrelevant. Oil and natural gas products contribute almost a trillion dollars annually to the GDP. A reduction in supply would be inflationary. Inflation can be caused by the same amount of dollars chasing fewer goods and services just as much as by more dollars chasing the same amount of goods and services. A better way to frame the question is whether the government will be able to manage a reduction in oil supply so that the result is a more or less evenly distributed reduction in purchasing power, or will there be a crash with otherwise viable economic activities shutting down in a ripple effect.

As I said to rainsong, what you are calling inflation is not inflation. It is just the market correcting for the relative supply of a given good or service. If it is in short supply, prices go up. If there are 10 people in a room each with $100 and a certain amount of goods and services, then they will bid them at certain levels. So long as there is just $1000 total in the room the total value of the economy cannot exceed $1000 regardless of whether one product goes up or down in price. That is just market action.

But if I come into the room as an external player and give every player $10 more dollars each, then the price of everything just increased. The same number of goods and services still exists. The same number of buyers exists. But the total cash in circulation is now $1100 chasing the same goods and services that $1000 was chasing a few moments earlier. That is inflation.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

Hi Greyzone,

I have no expertise in this area, and like many can confuse it now and then.

But, he was suggesting a reduction in the amount of goods and services available. So even using your logic, it appears that could be inflationary as well.

But if I come into the room as an external player and give every player $10 more dollars each, then the price of everything just increased. The same number of goods and services still exists. The same number of buyers exists. But the total cash in circulation is now $1100 chasing the same goods and services that $1000 was chasing a few moments earlier. That is inflation.

These type of scenarios demonstrate how easily it is to confuse people about inflation, including me.

However, I concur that the primary definition of inflation is increase in money supply.

Greyzone, I have to agree with sf and PTO: A declining supply of energy with no increase in money supply should be equivalent to a steady supply of energy with an increase in money supply. Both describe a situation in which too many $$$ are chasing too few goods.

No, that is not inflationary. That is just the market adjusting to a new volume of goods or services. If there is $1000 in circulation in the room and today there are 10 hamburgers and tomorrow there are 5 and the next day there are 10, then the price swings are simply effects of supply and demand. Inflation is ONLY a change in the value of the currency itself. What it can buy is determined by what is present in the marketplace.

Many people mistakenly believe as you do, but I hold to this classical view of inflation, as does Jeff. And so does Stuart, I believe.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

What ultimately matters are ratio between goods and services and the money supply and how the market performs the mapping
between the two and the allocation of goods and services to produce more goods and services in the future (i.e investment.) The debates between the various definitions of inflation don't seem to be productive since they focus on narrow views of the system.

These scenarios are a purely static analysis. (The dynamics are, of course, quite different in a system predicated on eternal exponential growth and various financial fictions!)

Increase in goods & services and a proportional increase in money supply => stable prices. This is "sustainable" growth.

Decrease in goods & services and a proportional decrease in money supply => stable prices (This is not often seen in an economy run by humans.)

Decrease in goods & services and stable money supply => increasing prices

Decrease in goods & services and increasing money supply => even more increasing prices.

The last case is what peak oil will probably amount to since energy is the fundamental input into the production of goods and services an the likelihood an orderly decrease of the money supply seems next to nil. I predict rising commodities prices (things are consumed) and decreasing "non-producing asset" prices (things that take up space but have no productive capacity.) "Hyperinflation" is always possible if the government decides to monetize debt or to literally print money,


Sorry but you nailed it perfectly thats the problem we face.

What I would like to add is that the ability to borrow money is ultimately backed by your fixed assets for secured loans.
In the case that the asset value is declining banks will be unwilling to lend money except at exorbitant interest rates and large deposits.
For either purchasing other non performing fixed assets or to use them for loans to facilitate production. This causes a positive feedback loop to form since the ability to make monthly payments is income limited and real loans cannot be 100% interest payments.
Fixed rate loans are dead and adjustable rate ones can easily put the borrower under water.

I do believe in the classical myself, as I ended the post. But, I think this is where reality and theory diverge, and the main confusion point for most.

Now, on a slightly different tangent:

From a layman's perspective, price inflation is real and tangible. Monetary inflation is not always tangible. This is part of the reason they can hide the M3. Monetary inflation impacts the economy at a different level than price inflation.

With a situation like PO, we are likely to have both, for separate reasons - general economic woes driving monetary inflation, while real goods shortages drive price inflation at the same time. And in this case, does 2+2=4? I guess we will see.

Oh, definitely agreed. We will see price increases (I refuse to call them inflation) because of peak oil. In fact, even if the money supply was not inflating, the physical results are the same - people making do with less real goods and/or services. The only question is the denomination of the currency used to purchase those goods and services.

I am not saying things would be any easier without constant inflation. It's just that the constant monetary inflation allows the US government to quite literally impose a global tax (so long as the dollar is the global currency). This and this alone is why the Fed must inflate. The tax revenues must come in to keep the empire afloat. When the tax revenues fail to arrive, the empire dies.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

Can I ask why are you so vehement in using the classic definition of inflation = monetary inflation only?

What do you call then (the common mainstream economic concepts) of:

- cost inflation (i.e. when costs rise even when nobody touches the money supply)
- demand inflation (when demand causes prices to rise, even when nobody touches the money supply)
- imported inflation (we have had lots of that outside US, thanks to the petrodollar)

I don't mean to argue, I'm just intrigued and I am by no means an expert here (fully admitting I could be off the base).

On a related note, I rarely see anybody in physics using antiqued definitions, when more accurate and mainstream concepts are available. Is this a common trend in economics? :)

BTW, I don't think money supply increase IS inflation. It affects the process of inflation. I think a process cause is not the process itself. Even if you think in classical terms.

I know this is very academic and besides Jeff's point, but I think it affects the way people have understood the message and are able to discuss (or not able to).

Those things are simply supply/demand equilibrium being found due to changes in supply or demand. When costs rise and the money supply is at fault you always find that eithe demand has increased or supply has decreased. Always.

What you call demand inflation and cost inflation are the same thing. All that differs is who is the buyer and who is the seller. And in both cases the cause is a change in the demand/supply balance. Classic economics.

And imported inflation is still demand/supply changes at work, unless the imported inflation is caused by changes in the supplies of the two currencies involved.

All of these things are just price changes due to supply and demand whereas real inflation is a price change due to devaluation of the currency irrespective of supply or demand.

I find that any other definition obfuscates the discussion.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

Wait! Before everyone goes off on the Austrian School vs. everyone else definition of "inflation", you should all realize that you're talking about two different definitions! This ALWAYS happens when folks discuss inflation. In the Austrian economic school definition, inflation is an increase in the money supply. In everyone else's definition, inflation is an increase in general price levels. I wish Jeff had made this clear in his post so that we could avoid this kind of arguing.

Greyzone is using the Austrian school definition of inflation. SF is using the generally accepted definition of inflation. It always pisses off Austrian school followers that everyone else calls price increases inflation, but that's what most people think of as inflation. Then the Austrian folks say "what you are calling inflation is not inflation", and everyone else thinks they're nuts.

Please indicate whether you are using the Austrian school definition of inflation or the common definition of inflation!

Thanks To Jeff for an interesting topic for discussion.
Austrian theory is simple, why confuse the issue?
Greyzone is simply saying that a price rise doesn't = inflation. It may be a symptom.
Why do people call rising home prices "appreciation" and rising oil prices "inflation". Misleading and unnecessary.
Follow the money supply.
Interestingly, the stat in the news today is that China's M2 is up over 17% year/year. That is due to their monster U.S. trade surplus, and has built them $1.2 trillion in reserves.
What China does with these reserves will tell us a lot about what to expect from commodity prices and interest rates. As Japan industrialized, their currency rose several times vs U.S. dollar. If China decides a strong Yuan is in their best interests and they allow it to double or triple vs the U.S. dollar then they they will be paying that much less for oil relative to the U.S.

The Austrian School version isn't quite as simple as it appears (are you sure the measures of the money supply aren't manipulated?), and the vast majority of people have never heard of it. The standard definition of inflation is a general increase in the cost of goods. The Austrian School was a break-away from that standard definition, which the Austrians found wanting. The other problem with the inflation = increase in money supply definition is that people can't see it. From most people's perspective, there hasn't been that much inflation until recently, though by the Austrian School definition we've had inflation for over a decade now:

(from Economagic )

I tend to think of the Austrian definition as more predictive, and the standard definition as more descriptive.

People call rising housing prices "appreciation" because of real estate agent double speak (the same double speak that made you write "home" prices.) That's the Iron Triangle at work.

I tend to think of the Austrian definition as more predictive, and the standard definition as more descriptive.

Well said.

The M2 chart you provided shows rapid M2 acceleration from 1997 to present. That lines up with the bubbles showing up in the stock market, real estate market, and unfortunately for most consumers- now the commodity market.

Greyzone is using the Austrian school definition of inflation. SF is using the generally accepted definition of inflation. It always pisses off Austrian school followers that everyone else calls price increases inflation, but that's what most people think of as inflation. Then the Austrian folks say "what you are calling inflation is not inflation", and everyone else thinks they're nuts.

The question is really whether or not price inflation can lead to changes in the money supply.

As I read it, whilst oil price rises cannot in themselves increase the money supply in the Austrian sense, it can have one of two effects:

1. You spend your money elsewhere (no inflation occurs). Less oil is purchased. More of other goods are purchased.
2. You buy the same amount of oil, but have much less money for anything else. Total spending goes down. The velocity of money goes down. The money supply goes down. Deflation follows on from this.

I've never really understood the velocity of money side of things, but this is what I would be concerned about.


Too many knobs to turn.
We should also keep in mind that costs are always relative to the ability of consumers to pay them. Gasoline might stay at say $3/gal but if median income goes down, the relative cost of gasoline goes up. If unemployment goes up, the relative cost of anything with a stable or rising nominal cost goes up.

I see inflation coming for certain things, deflation for others. If oil rises in price because of scarcity (market driven price increase) it will likely rise even more because of inflation (increased money supply) providing a 'double-whammy' for some commodities.

Labor, on the other hand -- especially low skilled-- will be dirt cheap and getting cheaper, leading to lots (more) de-facto slavery. Maybe nominal wages will remain stable, but actual value of the dollar will be plummeting, providing a big cut in pay.

Of course there are obvious areas where deflation will rule. Used SUVs will be a bargain. They will make nice greenhouses, if a bit unwieldy. But what about housing? I can see deflationary pressure on housing prices with high unemployment, but nominal prices might remain high because of inflationary money supply. I guess by GZ's definition, this wouldn't be deflation, but market action. It will hurt no matter what it's called.

A real scary thing is the foreign-exchange aspect of the dollar. With (hyper)inflationary amounts of dollars being created, foreigners will have no choice but to protect their trade value by rapidly increasing prices of anything they export to the US, including oil.

So, hyperinflation with notable areas where market pressures will keep prices down.

Actually, inflation ia a general increase in prices, and it does not matter what was the reason.

James Gervais
Hope was the last ill to escape Pandora's box.

Multiple trillions will evaporate in home equity, slowing the economy to a crawl, perhaps even reducing petroleum consumption (ala depression). The housing credit bubble is bigger than anything in the past, bigger than tulips, internet stocks or all of that put together. Inflation is based upon an expanding money supply through cheap credit. This is all going to end tragically in the next few years.

On the way home from the crumbling metropolis this evening I picked up a free copy of the Boston Herald. (it is so pathetic that they give them away these days) 9 full pages of RE public auction notices !!! We are just at the tip of the ice berg...


Correct me if I am wrong. It is my understanding that the US no longer reports increases in money supply. I have heard rumors that the we (the US) are printing more money. Lots more. Would a large increase in money supply be an over riding effect ?

Foger Rox, the Fed has lost control of the money supply because foreign banks make loans repayable in dollars and accept dollar deposits. And many countries won't accept dollars and covert them to Euros and other currencies because of political considerations, i.e. Iran and Venezuella.
P.S. The sky is falling!

Here's a short quote from the article that I wrote on the end of M3 reporting:

"In short, M0 is the value of all US currency that exists in actual bank notes and coins. M1 is M0+checking accounts. M2 is M1+money market accounts and CD's under $100k. M3 is M2+all larger holdings in the dollar (Eurodollar reserves, larger instruments and most non-European nations' reserve holdings). The key point here is that which will be lost when the Fed stops reporting M3, but continues to report M2 and M1: we will lose transparency on the value of reserve holdings in dollars by other nations and major financial institutions."

The Fed still reports M1 and M2, but the data that is no longer reported in M3 is exactly that which is needed for transparency in foreign dollar holdings...

we will lose transparency on the value of reserve holdings in dollars by other nations and major financial institutions

This is true, but we still have Eurodollar futures going out to the end of the year 2015. Have they no predictive value?

I believe it is M3 that is no longer reported. This is the 'loosest' definition of money. There is controversy over whether this means anything significant or not. Don Sailorman, economist extrordinaire, claims it doesn't.

On the subject of M3, economist James Hamilton says over at Econbrowser that there's no evidence suggesting that M3 helps predict U.S. inflation or economic activity better than M2, but does give a nod to the jump in M3 growth just before it was killed, "which raises the possibility in some people's minds that U.S. inflation will suddenly start being fueled by eurodollars and large time deposits".

IMO, we are seeing inflationary effects in the energy and food sectors with deflationary effects in auto/housing/finance.

I've used some form of my consumer at a four way intersection metaphor before, but my current version is as follows. The American consumer is standing at a four way intersection with four 18 wheelers headed his way:

(1) Rising energy prices;

(2) Rising food prices;

(3) Declining real estate prices;

(4) Increasing competition for jobs.

Note that people like Daniel Yergin, who, in effect, have been encouraging Americans to continue buying SUV's to drive to and from large suburban mortgages, were offering Americans the worst possible advice at the worst possible time.

I think that you raise an interesting point with the declining real estate prices. IF those prices really decline, and if the current trend in tightening of access to "value" in that real estate via home-equity loans continues, then this would be a deflationary trend--less money availability to consumers to pursue other goods and services. However, here is where I think the political reality will force the Fed to overcompensate with inflationary policies: the more the public can't afford their mortgages, the more the whole housing bubble threatens to "tip." The "easiest" solution--from a short term political viewpoint--is to inflate down the mortgage burden of those with fixed rate loans. This will, of course, serve up those stuck in adjustable rate loans as a sarifice (as interest rates will also increase) to shore up the prime-borrowers who have fixed-rate mortgages, but I think that people who can't get out of ARMs are already over the edge. Just my take, anyway...

Assume they inflate by first subsidizing the movement to fixed rate loans for the arm holders. Fine but the interest rate will continue to rise and the real purchasing ability of new buyers in the housing market will drop because they have to pay both the principal and interest so the absolute value of the asset has to drop in price as rate rise.

You cannot keep non-preforming fixed assets from devaluing.
No monetary policy is going to restart the housing market until prices drop back to sane rent equivalent levels. And since we have a large number of empty homes and condos owned by speculators the supply of potential rentals is far larger than the market at the higher price levels. So once these units are converted to rentals you have no market pressure on rents. The only reason you would have pressure now is simply because so many units are setting empty because they are not cash flow positive. Once real investors can convert these units to reasonable investments the slide in prices will get worse fueling more investment purchases and conversion to rentals. The real housing market is buoyed by the ability of "real" real estate investors with cash to convert a non-preforming asset into a preforming one via rents. Once you eliminate unqualified buyers then life can get back to normal. At the moment its cheaper to build rental properties that are cash flow positive instead of buying this is just adding even more supply to a artificially tight market.

The current housing bubble is going to bust beyond what anyone can imagine until people with cash can leverage it to make money out of real estate and stabilize prices.

Is it possible to inflate mortgages into insignificancy if wages aren't adjusted for inflation?

You can do a lot of things if you don't need people to enter the housing market. As long as your market can handle everyone that does not own a home being "priced out forever" your fine.
The moment you get back out of the clouds and deal with the need for new home owners to exist because of death/job loss/divorce etc among the vaunted home owners any scheme that does not end with homes being affordable dies. All vampires need fresh blood.

Jeffery, One of you other valuable points is that kids may move back in with Mom & Dad because increased compitition for jobs keeps wages low and they can't afford rent leaving even greater empty houses.
Fewer buyers + less demand + less equity = less spending which for our economy means fewer burger flippers = lower wages = increased compition for jobs = lower wages = compitition for remaining consumer dollars = lower prices = lower wages.

My guess is that the US is heading to the third world.

In making your assumption that oil decline will be inflationary, you have assumed that the political desire to devalue debts will win out. However such game playing will not be ignored by the rest of the world, particularly those that hold most of the US debt. At some tipping point they will abandon the US dollar, dumping that debt. That would be simultaneous with the death of the petradollar and even greater problems for the US economy. In essence that approach would act to cut the US off from world trade and as a consequence world oil. At minimum that would be an immediate 50% reduction in US oil usage, overnight.

I'm not so sure the US can inflate its way out of trouble. This isn't a world where you can go it alone anymore.

I would expect different countries and economic blocks to take different routes, each looking to bolster its own position at the expense of others. The US starts this game with much to lose, but I think they will be forced to support the dollar with high interest rates and strong money - otherwise they are guaranteed to lose.

I don't think the Fed has a choice. Deflation leads to economic collapse no matter what. Inflation at least pretends to give them a shot at controlling the scenario.

Yes, in the end, it all blows up in their face. But I think Jeff's question is what does the Fed do first? I think ultimately it has to inflate.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

Put it this way. If you try to inflate, your creditors around the world kill your currency, your control of the oil currency, and thus your oil imports, trade, etc. They do it very fast such that gas goes from $5 to $40 and difficult to obtain almost instantly.

If you do the opposite the populous screams, but you live to fight on, and anyway - you've got the national guard.

Deflation isn't really the issue - without trade with the rest of the world you don't have a country left. With massive debt, in reality the control of your affairs passed to your creditors a while back.

Sure, but currency devaluation is inflationary, at least in the short term. All of those dollars leaving foreign reserves and heading back to the US will just exacerbate existing inflation. From a non-Austrian perspective, the price of all imports will increase as the value of the dollar falls. Petroleum being a significant import, that argues for an inflationary spiral. Think of Argentina in 02/03:

I don't know, either, but I'm still leaning toward peak oil being deflationary. Helicopter Ben won't have enough helicopters. (No, I don't mean that literally. What I mean is that the power of the government won't be a match for the economic forces unleashed by peak oil.)

In particular, if we print dollars like there's no tomorrow, it's likely to make oil-producing countries unwilling to accept them. If it leads to wholesale dollar dumping, it will be Doomsday for the greenback.

Of course, if Bush/Cheney control the key oil fields in the Middle East, it is one way to force countries to continue to accept rapidly depreciating dollars. On the other hand, if Bush/Cheney can't maintain their control of the oil fields. . .

This is one of my greater concerns: I think that the short-term time horizon of our political process demands that politicians pander to the populace, who in general do not understand the dynamics at play here. To appease this group, the will inflate, and the discontent that this will create with our trading partners might be addressed via military means. I'm concerned that the exact problems that inflation will cause will tend to be addressed by equally short-sighted military action that will make the imprudence of recent actions pale in comparison...

This is the fear that I see more and more the situation worsens.

Again, I see this event horizon is getting disturbingly close. Especially in light of the coming 2008 elections...yikes.


We don't have to maintain control of the fields just hold the world hostage with the threat of attacking Iran.

Then I don't think we disagree much at all.

Look, what I am saying is that the Fed's response will be inflationary because they don't have any other choice. I also believe the death of the petrodollar is inevitable, after that hyperinflation plays itself out. And historically, after every hyperinflation, you end up either in the same position as a deflationary crash... or an even worse position.

The ultimate end may be deflationary but the initial response of the Fed will be inflationary. If you are lucky enough to be in an industry where your salary manages to rise to track inflation, then convert those dollars to real goods as fast as you can. And if not, well, just hang on tight for the ride because what goes up must come down.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

... the initial response of the Fed will be inflationary. If you are lucky enough to be in an industry where your salary manages to rise to track inflation, then convert those dollars to real goods as fast as you can. And if not, well, just hang on tight for the ride because what goes up must come down.

I suspect few will be lucky enough to be in a position where salary tracks inflation -- salaries at the very top may do so.

However, if you are like me (salary flat for the last four years), then you've got to come up with a strategy for dealing with hyperinflation. In this environment, I see services being generally devalued (even medical and health services) while essential manufactured goods (food, clothing, tools, etc) could rise rapidly in price. This says to me that I want to avoid variable rate debt (especially), learn to produce as much as I can of my essentials -- food and fuel in particular -- and to accumulate whatever tools or materials might be necessary to help ride this out.

---wrote"This says to me that I want to avoid variable rate debt (especially), learn to produce as much as I can of my essentials "

In a PO world , debt is meaningless- load the boat , per se

get what you need to survive now, would be the right response-

that's what our Military is doing for us now in the ME.
Damn the cost, get the resource

In a PO world , debt is meaningless- load the boat , per se

bear, you may be right but I haven't the stomach for it. I have 12 years to go to pay off the mortgage and if I were to lose my job, my only recourse would be to dig into my "retirement" savings -- 401K and IRA money. I'm guessing I'd take a big hit, tax-wise, and I'm not sure what the limits of withdrawal are.

I'm trying to walk, what for me anyway, feels like a middle-road -- minimize debt, acquire useful hard assets and be ready to live without pay or Sociable Security, if it comes to that.

The problem with wholesale dumping of the dollar is that nearly all the world is doing the same thing we are doing. If you are an oil producing country, you have to choose from the large fiat currencies available. You want liquidity and convertibility. That limits you to the dollar, the Euro and the Yen. When dealing with large sums, the Swiss franc type currency is not an option. Gold is not a practical option because it does not have a stable price, is difficult to move around and pays no interest. So as a practical matter you can choose the Yen which pays a very low interest rate and whose government runs percentage deficits even larger than the dollar. Or the Euro which has no government behind it, just a confederation of independant countries. So what stands behind the Euro? Nothing. This is the dilemma for exporters. Dumping the dollar is a good scare story, but value has to be stored, at least temporarily, in something and the Zimbabwe type currencies, of which there are many, are not an option.

Gold may pay no interest, but it has appreciated > 10% every year for the last 5 years against the $ and to a slightly lesser extent against all major currencies.

As far as moving it around is concerned, you only need to move the net result after paying for your imports. (Assuming you dont trust a bank somewhere to keep it for you in an allocated account).

The oil-producing countries seems to be moving toward the euro.

There's also the e-dinar, a Muslim currency which is supposed to be backed by gold and silver.

The US buck today is an ever hollowed out IOU. There was a time when the productive capacity of real goods and services of the US stood behind the dollar's worth, and its place as a store of value. Now, mostly all the US has to offer aren't real goods and services (except at playing globo-cop blowing up people and places, while threatening to do it elsewhere), and what we do offer is the largest ponzi scheme of trading our IOU's for your real goods that the other traders can fob off in exchange for other goods elsewhere.

Everyone dealt in on this scam is stuck with using the buck to get what they really want, goods in exchange for goods, while keeping their people employed making and selling goods. Getting out of this ever diminishing return on the worth of the US IOU is akin to playing hot potato and musical chairs. No one wants the music to stop, and no one wants to get stuck with this hot potato and no chair to fall into when, sooner than later, the music will stop.

Hence, the Fed and all the other big central bank holders will string out this hot potato musical chair game as long as they can for the benefit of trying to keep their real product producing economies going. PO only adds to the complexities of this game. But how it will do so is beyond anyone's predicative abilities except in gross generalities. In the short term, just based on all the imbalances in the US economy today, IMHO, I'm supposing a massive dose of stagflation is in the cards.

For those of us living here in this festering credit and debt land mess who do ultimately represent this IOU, no matter how one skins this cat, I think we are screwed.

godraz: "For those of us living here in this festering credit and debt land mess who do ultimately represent this IOU, no matter how one skins this cat, I think we are screwed."

Rape might be the more appropriate descriptor. They sure as hell did this without my permission.

What is behind the Euro is the European Central Bank (ECB), whose directors according to the founding treaty not subject to any Government or International control. Indeed teh hopefully defunct attempt at a new EU constitution created a new sub-divion of the elite - Central Bank Governors - who were not to be subject to any government instructions even in EU states such as the UK which are not eurozone members. What are the policies of the wunch of bankers who are in control of a major EU financial policy? Yesterday, Mr Trichet, head governor, made it clear that they were most attentive to inflation, especially increases in wage rates. In his opinion an increase in fuel prices resulting from reduced oil production should not be offset by wage increases - otherwise the bank will increase interest rates to increase unemployment. Trichet also refused to comment on the increase in the euro versus the US dollar. The EU politicians are clearly in favour of higher inflation, lower interest rates, and faster growth. The bankers have exactly opposite priorities. The conflict will be resolved in the traditional forum - the streets of Paris.

Hi Leanan,

I have seen this kind of article by the dozens. Right off the bat, here is the historical value of the dollar:

So when someone starts waving thier hands about the dollar value a red flag goes up.

Another problem with this kind of analysis is that it is done in isolation. As if the major economies of the world have no non-performing loans, long-term government debts. When, for example, Japan's government debt to GDP is more than twice ours.

Yet another assumption is that the rest of the world, much of it geared for our consumption, can just stop producing without recoil? They never say, but does Europe become the great consumer for China?

No, this kind of article is anything but informative. It is based on premises that just don't exist.

Best, Dan.

Nothing like a discussion of religion or economics to bring out ideologies and beliefs. But, if you have ten people and twenty carrots and tomorrow you still have ten people but only ten carrots, the result is deflationary. How you plan to mask, resolve, negotiate, price or whatever is called politics. We are trained to confuse the two. The fact that the price, temporarily and for a lucky few, goes up is irrelevant to the case that the ability to consume has been deflated.

Why there are only ten carrots, what can be done to increase the supply of carrots, or what can be done to substitute for carrots is political in most usual cases, but in this case geology has the final say. From the point of view of the totality of humanity, the coming shortages will have the effect of rendering most of what we have wrought pretty much useless in a future sense as its real value diminishes in the face of a shortage of carrots. Too many cars and buildings and not enough 'go goop' to power them. How we choose to obfuscate monetarily is irrelevant.

BINGO! Give the man a carrot (smile)!

Energy is the essence of life, the economy included. Less energy = less life = deflation. By definition.

Printing more money does not produce more oil.

Not quite your mixing real value for assets with money supply.

A asset that is decreasing in supply will rise in price and be confused as inflationary ( on purpose ) vs one that is in ample supply regardless of the money supply. The supply of money is simply moving decimal points around not changing the value of the digits. If you think about monetary inflation as simply to move the decimal point while asset value determines the absolute cost you can keep all this strait.

This means the money supply must be absorbed in the creation of real assets to convert it to value and change the real numbers thus the goal of the economy is to ensure any scarce asset is met with a glut of production decreasing the real price monetary inflation is used to drive this by preventing savings and keep the velocity of money high (debt)

Fractional banking is a ruse to make people feel real money exists and storing money instead of converting it to debt is
a waste of time you can always ask the fed to print money if people access their accounts.

Thats our global economy.

It's all smoke and mirrors.

I agree with your points. If we indexed the dollar to a commodity such as oil, as oil becomes more scarce, we would have a deflationary effect similar to the deflationary periods during the 19th century USA with the dollar pegged to gold supply. (I do not think a gold-backed dollar is a good idea, even though owning gold might be a good idea).

But deflation and inflation defined strictly have to do with money supply relative to commodity supply and not commodity supply relative to human supply. It may be irrelevant in terms of overall hardship coming at us, but it may help individuals understand some of the dynamics and better prepare for what is coming.

This is why I'm thinking I'm right. First the peg would be on energy and resources not just oil. Oil would be one substance thats indexed but so would nuclear and wind energy.

Post peak resource/energy=money the number of people is irrelevant and far greater than the money supply. Probably we would have two types of currencies a local script that most people get paid with good mainly for food and necessities and a peg currency that can buy real goods and services but only available to the elite. Most people are basically slaves and the script payments just keep them happy. You might have a exchange or conversion ratio so some consumer goods make it to the poor but they will pay dearly for real goods maybe only on the black market thats allowed o flourish.

Most countries actually work this way the local currency is only really good for local goods.

I disagree. Less energy = less economic activity producing value, but this does not necessarily equate to deflation. If you have 10 people and you decline from 20 to 10 carrots, you have lost value. However, if you maintain even the same quantity of money to purchase those carrots, then there is monetary inflation--more money pursuing fewer goods.

I agree that the inflation/deflation issue is a monetary obfuscation of a decline in economic value, but I disagree that it is irrelevant. It is highly relevant to economic choice--how do we prepare for this event, what economic choices do we make today and what do we plan to make in the future. Given that, as individuals, we have minimal say in the big picture issues of oil depletion, military intervention, etc., I would go so far as to argue that picking the right side of the inflation/deflation divide is one of the most relevant things that we can do.

If we experience inflation, then debt is not bad as long as it is at a fixed rate, reliance on any entitlement system (medicare, pension, etc.) is unwise. Conversely, if we experience deflation, then debt is bad, especially at a fixed rate, and fixed entitlements--provided that the backing institution remains viable (big IF)--are good. This is a critical divide, and one that is highly relevant to the individual...

What we have seen in recent years is an enormous credit inflation, but credit is essentially virtual money. Changes in asset prices happen at the margins - if a few holders of a particular asset class agree a lower price while all the others do nothing, then the price of that asset class falls for all holders and virtual value has disappeared. This is currently happening in the housing market, where trillions of dollars of supposed value stand to be wiped out over the course of the coming credit crunch even though most homeowners will do nothing.

The scale of the current debt load is out of all proportion to the means to repay debt, meaning that a great deal of involuntary debt liquidation cannot help but impact upon the money supply. As virtual value evaporates, debt default decreases the money supply, and lenders become increasingly conservative, a deflationary depression develops. The Fed may wield its magic wands, but doing so would court disaster in the bond market and could precipitate the kind of panic that is capable of destroying liqudity faster than even the Fed can manufacture it.

A credit expansion is nothing more than an elaborate pyramid scheme, and pyramid schemes always collapse eventually. Those who get in and out early get out with the lion's share of the value, while those left in at the end are left holding the empty bag. I would argue that the bag is already empty, but that people have yet to realize it.

Also consider that the US economy is large enough to consider in isolation we have a lot of debt that is internally issued and owed in dollars. Now I don't see inflation helping the poor home owner internally but a initial inflationary phase will help settle the debts of the wealthy that own the means of production since they will get more money from price inflation out of workers who's wages are dropping in real dollars. So for the wealthiest inflation allows them to clear their debts at the expense of the middle class. In general this class is diversified so its simply causing a large transfer of wealth from the poor to the rich.

Also these same people are hedged with foreign assets so they can cover the global effects of inflation. The net effect is the rich are made immensely rich and everyone else is dirt poor. Once inflation is no longer effective at driving wealth too the rich and they basically own everything they will stop inflating the currency via borrowing and cause a deflationary crash in the money supply along with rising interest rates. The initial inflationary run coupled with rising interest rates and stagnant wages simply consolidates real wealth. This effect is whats powering the stock market but more its being used to take companies private via LBO's. I think the next stage is to see more and more companies taken private at a faster pace.

Next of course these same people will renegotiate the loans basically semi-defaulting to remove debt and retain the means of production. Remember when you borrow enough money that if you default it collapses the lender you own the lender he does not own you. Expect once the economic market cools these LBO's will reorg under bankruptcy to shed debt.

The key seems to be to take all companies that will produce real wealth post peak private. Thats the game today.
Actually its post collapse of the monetary system its just that peak oil is the pin that will keep pricking the balloon.

In fact we are seeing the firms that are facilitating these buyouts go public to raise money but the assets they purchase will be transferred out of the finance company so it can be collapsed later and the real owners retain the assets.

The thing about the wealthy is that they are, well, wealthy.
They are creditors, not debtors; which is not to say that they don't work with debt.

As creditors, the wealthy have an interest in the prevailing policy of low inflation.

Jeff seems to feel that a downturn in the economy will lead to a re-politicization of central banking. I'm not so sure. The wealthy have a vastly disproportionate amount of power. I think they will use it to maintain the 'independence' of the central banks and the low inflation policy. In this objective, they will continue to find a willing ally in the fastest growing segment of the population, the elderly.

"As virtual value evaporates, debt default decreases the money supply, and lenders become increasingly conservative, a deflationary depression develops."

This is my concern; with the stupendous amounts of debt in existence, coupled with the staggering amount of derivatives and other "non understandable" instruments outstanding, it would appear that a massive debt default could dramatically shrink the money supply and set off a deflationary cycle -- no matter what Helicopter Ben intended.

If banks are handed a lot of liquidity by the Fed, but the banks are afraid to loan it out, isn't that deflationary?

Stoney I agree with you about the credit situation that is beginning to occur. The creation of money through the fractional reserve system is based upon borrowing. The credit crunch that will unwind in the next few years will be highly deflationary as not only will people be less able to borrow as creditors tighten to try to mitigate their risks, but the evaporation of trillions of dollars of home equity is going to end the "housing ATM" that kept the economy fueled for the last 7 years or so. So it is going to be very very ugly and I think the slow down in the economy is already underway. "Peak housing" may perhaps delay Peak oil or flatten out the peak for a long while.

German inflation was so bad that the MARKS were burned for heat!

Bundled together they were more energy dense than the coal they could buy with them. Here is a picture ofr a german woman burning bundles of marks for heat.

German housewives were paid everyday at noon so they could rush out and buy anything before the price went up again, no use saving the currency: in a week it would be worth nothing.. Men would buy all the beer they would consume in an evening at the local beer garden because if they waited to buy after every round the price could have gone up substantially.

hyperinflation is inflation that is "out of control", a condition in which prices increase rapidly as a currency loses its value. No precise definition of hyperinflation is universally accepted. One simple definition requires a monthly inflation rate of 50% or more. In informal usage the term is often applied to much lower rates. The definition used by most economists is "an inflationary cycle without any tendency toward equilibrium." A vicious circle is created in which more and more inflation is created with each iteration of the cycle. Although there is a great deal of debate about the root causes of hyperinflation, it becomes visible when there is an unchecked increase in the money supply or drastic debasement of coinage, and is often associated with wars (or their aftermath), economic depressions, and political or social upheavals.

One nice example...
Inflation in Serbia in period of 1991 to 1995 was around 100 000 000 000 000 000 000 000% ( be free to name this number as you wish). In every few months we had a devaluation (removing of zeros so they could feet on paper) the big est bill (in number) was 500 000 000 000 dinars and it was worth around 5 marks (3$) on the day of publishing (every new bill was of similar value). The bills were with very small protection (who would forge such a thing as dinar) and in the last series of bills one monete of 100 dinars was without serial number (ps date was for first January 1995 and it hit a streets around 20th December 1994).
Now when i look at these numbers they seems so unreal.

Keynes' argument was that in certain circumstances, the money supply and government spending could be increased without causing inflation because it stimulates the production of additional real goods and services. This concept is a lot less relevant in peak oil than in the '30's, but there might be situations where it applies. A massive government investment in electric rail could reduce costs to other sectors by improving transportation. Subsidized government loans to put an aerorider velomobile or equivalent in every household could have a similar effect.

"Reserve Requirements: The Fed also sets reserve requirements for banks—how much they must keep in liquid assets to cover loans that they have made. For example, if a bank has $100 million dollars, and the Fed has a 10% reserve requirement, then that bank can (via fractional reserve banking covered by overnight loans at the Fed Funds Rate) generate loans of $1 billion dollars. If the Fed changes the reserve requirement to 5%, then that same bank can now make $2 billion in loans—this increases the money supply, and represents an inflationary pressure."

This is slightly misleading. To be exact what happens is:

If the reserve requirement is 10% and the bank has $1000 on deposit they can lend out $900 while keeping the $100 on deposit as the reserve requirement.

The total amount of money created through loans will tend towards $10,000 if each subsequent loan is redeposited in a bank account somewhere so that each bank can loan out 90% of each deposit.

It is important to understand that the starting point for all discussions of an economic nature is the law of supply and demand.

There are supply and demand curves for each form of energy; while it is an oversimplification to aggregate these into a single supply and demand curve for "energy", it will do for the moment. There are also supply and demand curves for a multitude of other goods. Again, it is a gross oversimplification, but let's aggregate these as "other stuff".

Now consider the typical household. You have a monthly income of $2000 per month, let's say. You have been spending $200 per month on "energy" and $1800 per month on "other stuff". Presumably millions of other consumers and producers have been making allocation decisions, thus establishing equilibrium prices for "energy" and for "other stuff".

Now, let us project a decline in the supply of energy. The supply curve shifts, and -- at least initially -- the demand curve remains relatively inelastic (which tends to be the case for energy demand in the short term). The price for energy will shift to a new higher equilibrium. Let's say that what our household could formerly buy for $200 now requires $400. Given that we are talking mostly about home heating, fuel for commuting, etc., the household will also have limited ability to reduce their energy demand in the short term.

What will the household do? How will they cover the $200 energy cost increase?

If housing prices were continuing to rise and sub-prime lenders were still giving out cheap equity cash-out money, then perhaps our household could refinance or take out a home equity loan, but that avenue is being closed off before our eyes. They could just charge $200 of their expenses, but credit card interest rates have risen and many people are already maxed out; not a good idea in any case, and certainly not a sustainable one. If they had been saving money then perhaps they could have dipped into their savings to cover the increase, but this does not discribe the situation of most Americans.

No, what most people will do is the simple and common sense thing that everyone will be forced to do, sooner or later: They will find some way to reduce their purchases of "other stuff". If our household is middle class, there is probably plenty of room to cut out discretionary purchases. If they are just barely subsisting, then this is obviously a much more painful exercise. But it will have to be done.

The effect of the millions of inevitable decisions to cut expenditures on "other stuff" to make room in household budgets for rising energy costs will be to shift down the demand curve for "other stuff". This in turn will reduce the equilibrium price of "other stuff."

Bottom line: The price increase in energy will be matched by a price decrease in other stuff. If you had a price index composed of energy and other stuff, the net result would be very little, if any, change in the index.

Conclusion: The mere fact that energy will be declining in supply and increasing in price will not necessarilly result in an increase in the aggregate price level. Such an increase may occur, and it may occur because of an expansion of the money supply and/or depreciation of the US dollar, but for other reasons (mostly political rather than economic.) However, the inevitable relative decline of non-energy prices in response to a general increase in energy prices will have huge implications for our national economy.

So what happens when the people who make "stuff" are caught between the pinch between rising costs of production (due to the cost of energy) and declining demand curve (due to the cost of energy)?

I'd assume that those who depend on fossil fuels would shift their focus to premium goods and richer customers where the price spread would be sufficient for them to stay in business. Those who couldn't make this shift would simply go bust.

To carry that further, the people who made or sold those things no longer being bought will lose their jobs. Less flying and driving to jobs will occur, helping to moderate fuel prices in the short term. Also, things that require significant energy to manufacture could not be sold profitable at lower costs, so they would not get made. Fewer things transported to market also decreases fuel usage.

With both positive and negative feedbacks, predicting the economic future is a roll of the dice. Things will not be pretty, though, no matter which way the wind blows.

However, the inevitable relative decline of non-energy prices in response to a general increase in energy prices will have huge implications for our national economy.

Which is why I have been recommending ELP, otherwise known as "Cut thy spending and get thee to the non-discretionary side of the economy."

I think there's a double whammy inherent in your supply-demand conclusion in that your right that the household in question will reduce it's consumption of 'other stuff' in response to an energy price hike but this 'other stuff' itself has a major oil (energy) input component and thus will rise itself over time...

So whereas before you spend $1800 on 'X' amount of stuff you now spend $1600 but you don't still get 'x' amount as the price of this stuff has also risen due to this higher cost energy component...

Unless we can maintain overall energy input into the system or -by increasing energy efficiency achieve the same- the upshot IMO is that the amount of 'stuff' people consume will inevitably have to decrease as Energy costs eat into spending resulting in a reverse of Consumerism (for 'non-vitals') : Frugality :

As the cost of stuff that represents 'basics' also rises due to their inherent energy content I think this will inevitably be seen as an inflationary pressure and takled with higher interest rate rises. It will be interesting to see to what extent governments risk recession in order to stave off these inflationary pressures.

Regards, Nick.

Let's be honest--
This is all superstition based economics, similar to believing in invisible friends. A smart 10 year old can tell you why it can't work. One cannot expand indefinitely in a finite resource base. Until we use our collective imagination,
we are destine to argue about Monetarism as reality. This is as relevant as the Austrians in 1915 wondering what Hapsburg will rule them next--

Honesty = looking at the root of a problem and treating that. Most people prefer just to quibble over symptoms... But this was raised as a debate over inflation/stagflation/deflation - not so much a debate about the monetary system itself.

"You can never solve a problem on the level on which it was created."
Albert Einstein

I will attempt to sidestep using the word "inflation" and instead talk in terms of relative prices and standard of living.

Whenever Peak Oil occurs, two items strike me as clear:
(1) The relative price of oil & goods that use a non-trivial amount of it as an input will rise. (Unfortunately, not all of these goods have attractive substitutes.)
(2) Standards of living for consumers worldwide will drop (all else equal).

The big question as I see it is, can the US get energy efficient enough fast enough to handle, say, $150 oil without a gut wrenching recession? I see stagflation as the best case scenario during the transistion period from plentiful, cheap oil to a Peak Oil world.

Under the $150 oil scenario, the airlines will be hurting, rail should benefit, & trucking should get crushed. Some domestic manufacturers may get a reprieve from the make-everything-in-Asia-and-ship-it-to-the-USA trend. Food prices will rise. Those at the lower end of the economic food chain will face some tough choices: give up the car & use the bus/train/bicycle or do without other consumer items. The big train called Forced Conservation is on the tracks. Choo! Choo!

Last night while driving to a friends house, one of my sons commented on the recent spike up in gas prices. (With him turning 13 on the upcoming Friday the 13th, he's beginning to pay attention to gas prices.) When I mentioned that gas prices could be $6/gallon in 3 years when he gets his license, he commented, "6 bucks a gallon! Then I won't drive!". EXACTLY... One "benefit" of Peak Oil is that traffic congestion and the pollution it causes may get "solved".

i'm no economist, but ...the u.s. is a nation of debtors, big time. the japanese, on the other hand is a nation of savers. they delt with the economic collapse of their real estate market-stock market in 1990 in a manner that savers do. they went into a deflationary depression that lasted for 15 years.

the u.s. , on the other hand has to monitize their debt by inflating the currency. that is currently in progress. they can only hope that it doesn't get out of hand to the point of hyperinflation. i think that's a false hope, for reasons already mentioned above. have your wheelbarrows at the ready.

I think we've gone about this in the wrong way. First things first, the true driving force of any economy is its ability to do work derived from energy. As peak oil nears and ulitimately unleashes its punishment on the world, that amount of energy will go down. Less energy to do work equals less work equals economic contraction. Now the problem with money is that it is centrally controlled in its production and general management. Money is only as good as the bank managing it. What the Fed is trying to do is limit the amount of dollars coming back into the markets from M3 by raising interest rates. What this indicates is its belief that massive hyperinflation is possible. Of course as economic activity contracts you will have bouts of deflationary pressures (opposite of oversupply of money or lack of resources, but undersupply of money and excess of resources). The reason you will have deflation is due to thousands of finished goods being thrown onto a market where demand is light and production is nul, creating 'pockets' of deflationary pressures within the economy. In a macro sense, these pockets will at periods end up averaging the entire market into accepting even more dollars. This is exactly what is happening now. Home glut, car glut, on Feb. 27th Stock glut. Treasuries were an island. However over time, when economic contraction reaches equilibrium to the energy reality, or at least matches it, if money supply does not match it as well you will have inflation. With the amount of money we have in the world that means massive inflation. The key thing to measure in terms of peak oil and inflation is oil exports. How much of that export available in world oil markets is priced in dollars, and how rapidly is that changing. Oil exports will be one of the key indicators of which way the dollar will go.

Supply side economics
economics of scarcity

You need to understand all of those concepts in the meantime.

"The key thing to measure in terms of peak oil and inflation is oil exports. How much of that export available in world oil markets is priced in dollars, and how rapidly is that changing. Oil exports will be one of the key indicators of which way the dollar will go."

I agree. We are entering a period of time where the economic principles that we had some confidence in are becoming far less useful. When demand for oil permanently exceeds supply and the price goes through the roof I don't think we will be able to use any of our past theories or models to understand what is happening in the global economic system. People are too greedy and there are a lot of guns and missiles out there.

I am interested in what happens with the following feedback loop:

Oil price increases
US debt increases
Dollar depreciates in value
Oil exporters want the same value for their oil so they cause the oil price to increase by supply constriction
Rinse, Repeat

If we could reduce oil demand in step with supply this wouldn't be such a problem but that has a whole slew of economic side effects too because oil is so tightly knit into our culture.

Another problem is that if the US is creating lots of money to pay the foreign oil and trade bill but domestic wages are constant or dropping while energy prices are steeply increasing, the whole economy will be thrown into disarray.

I keep coming back to the problem of the US$ continually dropping in value whilst US$ denominated commodity prices continue to increase. This means that the US will be unable to afford the vast imports that it depends on. In the long run I can see the US$ becoming so unattractive that exporters sell in any other currency that US$ and the US$ loses its hegemonic status and its value. Of course the global economy has bought into the US$ so heavily at the current point that there will be a lot of resistance to moving out of it. I think everyone will try and delay as long as possible and it will be free fall when the straw breaks the camel's back.

I think the choice boils down to a simple issue.

Raise interest rates to protect the dollar as a world currency and cause austerity at home.

Inflate into bankruptcy. This can go down very very fast.
I think the Fed wants to inflate but they know it can quickly get out of control.

So I agree with the desire the Feds have to inflate I just think that it will spin out of control to fast and they will start jacking interest rates we are very close to this right now.

I have no doubt that the US is willing to protect the dollar at the expense of its citizens. If the US goes on a rate hiking bing it will force everyone else too this is the last power the Fed has. Inflation is no longer a option regardless of what the fed wants.

The problem is that the Fed has already pursued a highly inflationary policy during the vast housing/credit bubble. Much of this injected credit was put to work creating tangible assets (e.g. houses) that were bought on credit, and that credit is built into the economy in the form of securities that promise a rate of return in the future. Keeping the credit bubble going requires the issuing of more credit. The real limit of any credit bubble is the ability or desire to keep servicing the debt. We have reached that limit some time ago, and the whole rotten edifice is now coming down.

At the same time, the credit bubble went global in the process. Everyone (excepting the US) wants an export based economy for some reason. Euroland and Japan went into a rounds of competitive devaluation with the US to keep their currencies weak and exports cheap.

I agree with that rational analysis of the motives and techniques of the Fed would indicate the they cannot further loosen and must tighten. But asset deflation, a massive credit crunch, waves of foreclosures, bank failures, and perhaps fear of eventual lynch mobs are sufficiently frightening that one wonders whether rationality will prevail.

This doesn't even begin to take into account the interaction of the credit bubble and the decline of net energy availability (both peak oil and other localized shortages)!

We are in uncharted territory in many respects, and one that would be really interesting, if we didn't have to live through it.

The problem is that the Fed has already pursued a highly inflationary policy during the vast housing/credit bubble. Much of this injected credit was put to work creating tangible assets (e.g. houses) that were bought on credit, and that credit is built into the economy in the form of securities that promise a rate of return in the future. Keeping the credit bubble going requires the issuing of more credit. The real limit of any credit bubble is the ability or desire to keep servicing the debt. We have reached that limit some time ago, and the whole rotten edifice is now coming down.

I agree. I think we are at the beginning of a great tightening of credit standards which will deprive many people of any access to credit at all. Considering how many people are addicted to credit, that can only be very painful. The unwinding of the largest credit boom in history is likely to involve the most significant deflation in history, and I don't think there's a thing the Fed can do about it. The Fed's role has been to encourage the growth of credit, but it can only do so if there are willing and able lenders and borrowers, and if existing debt can continue to be serviced.

Inflation is not a "rise in prices" and it is not an "increase in the money supply." It is a change in the value of the currency. This value change may come about as a result of an "increase in the money supply" and it would most likely cause a rise in prices. When a currency's value falls, it generally takes more of the currency to buy things, as markets naturally adjust.

In the 1970s, the VALUE of oil was roughly flat but the dollar lost about 95% of its value, resulting in a 20x increase in dollar-oil prices. That's why, even though the $15 oil of 1985 was 7x the price of 1965, it was still "cheap."

Hi mindless,

I very much like your thoughts here, which seem the opposite of mindless to me.

re: "However over time, when economic contraction reaches equilibrium to the energy reality, or at least matches it, if money supply does not match it as well you will have inflation. With the amount of money we have in the world that means massive inflation. The key thing to measure in terms of peak oil and inflation is oil exports. How much of that export available in world oil markets is priced in dollars, and how rapidly is that changing. Oil exports will be one of the key indicators of which way the dollar will go."

Any chance you might expand this and explain a little more, with examples? I'm not sure how oil exports figures into it, exactly...can you be a little more specific?

And so...what do you see as positive action paths, on any level?

Hello TODers,

Being just your everyday joe, without much insight into the workings of the financial world, I thought that I would put a question to you as to where you would put your available cash? I have read cases forcasting inflation and cases for deflation. Some see commodities as the place to invest, such as gold and silver. Others say that with deflation you will see gold and silver crash. A while back I invested a significant amount of money in the silver market with the expectation that the crashing dollar would allow gold and silver to take flight. I would have thought that with the housing collapse and core inflation on the rise the logical next step for the Fed would be to lower interest rates, but have just read that they are hinting at a rate hike. Is a rate hike their only hope to try and prop up the dollar so as to continue to control the world oil market? With peak oil upon us and the housing bust just appearing, I am sure that I am not alone in trying to position myself for the certain volatility that is at the door. Any comments?

How about investing in yourself? Pay off your debts, take a community college course that will increase your income, buy some new hand tools, buy some farmland in a good climate.
Gold and silver aren't investments,they're commodities, anybody that tries to sell you something based on fear is a fraud. If they don't mention return on investment before they mention tax shelters or want to talk about Jesus or tell you how conservative they are take a hike. And, if you don't understand the investment don't buy.

That's part of the reason this discussion is important. Jeff summed up things very well above:

If we experience inflation, then debt is not bad as long as it is at a fixed rate, reliance on any entitlement system (medicare, pension, etc.) is unwise. Conversely, if we experience deflation, then debt is bad, especially at a fixed rate, and fixed entitlements--provided that the backing institution remains viable (big IF)--are good. This is a critical divide, and one that is highly relevant to the individual...

I'd recommend finding a copy of Stephen Leeb's books "The Oil Factor" or "The Coming Economic Collapse". I prefer "The Oil Factor", but the "Economic Collapse" book is an update. Leeb looks at the topic of personal finance from the peak oil perspective. You can probably find a copy at a local library if you want to save some money.

IIRC, Leeb recommends energy companies and inflation protection investments in the short run. He recommends being ready to switch to deflation protected investments when necessary, because he expects deflation after inflation.

Don't forget global warming. Buffet just invested in a railroad. I'm going long on sunscreen.


I would only say that it is inadequate to think only about individual survival. You'll spend your whole life on the defensive. You live in a time and a society that is going to be facing extreme turbulence. Become poltically and geopolitically aware and encourage others to be also. Start arguing with friends and family and enemies about what's going on in the world. Keep friends. Don't hate anybody. Don't bear grudges.

But, you have to eat:
0. Don't want stuff.
1. Rent, don't buy.
2. Stay out of debt.
3. Unless you have a fixed low interest rate mortage or other loan. Never, ever pay it off early.
4. Energy mutual fund maybe. Get away from the dollar in some of your investments if you can.
5. House repairs, other manual skills, a wide range. My kid brother turns lots of work away. The nation has become totally deskilled. Be in the minority.
6. Stay fit, walk, whatever. This is financial advice!

Such good advice!

The only way we can advance through the coming adversity is if we all work together. The hard times will someday be history; with open eyes we can make it a wonderful history. This discussion is really about how best to get on with it.

As oilmanbob pointed out, invest in yourself.

In the (in my opinion most unlikely) event of a economic doomsday, knowledge is far more worth than money, stock or a pile of gold. If everyone is facing the same shortage in food supplies, who's going to accept a chunk of gold in exchange for their food?

I don't believe in economic investments. I believe in knowledge and skills. My grandfather went through the nazi labouring camps and survived, got home again and found he'd lost everything. After the war he began saving money for his retirement and some 40 years later the iron curtain fell. Currency devalued and he found most of his savings worthless. But he knew and still does know how to grow food and live on minimal resources and that has always helped him survive.

Get to know how to grow your own food. How to repair simple items, and maybe later on more complex things. How to collect and purify water. How to make a fire and get the most value out of it. How to build a shelter or maybe even a house. Stuff that you need for your basic needs. It really isn't required in most cases that you have detailed knowledge of every step in a process, but get the concepts clear. How is stuff working, why is it working, what is the best practice of doing something.

For most of these tasks you will require tools, so go get them while they're cheap. An oh, we're facing an energy chrisis, so get the hand tools, not the power ones. Hammer, saw, crowbar, wrenches, screwdrivers don't cost much at all and gives you a nice toolbox that will take you a long way with your newly acquired knowledge.

It's also quite important to expand your social network. Get to know people and learn from them, and maybe equally important: remember what their skills are. Learning all the knowledge in society is an impossible task for a single person so time will come when you'll have to ask someone else, and by that time you don't want to spend your precious time looking for that special person.

And if you want to invest your money on something, do that on businesses that deals with the very basic human needs, since they're always be around in some form. Cars are not basic human needs, nor are electronics, fashion or italian couches. Food is, shelter is, water is.

The knowledge, tools and social network part is not only applicable in a doomsday scenario, it will help you in your life already. A good set of tools and knowledge of how to repair your car might save you hundreds or thousands of dollars when compared to what a repair shop takes.

This will not only decrease your expenses, it will also increase your freedom and your self-esteem and propably make you feel very good too.

Good luck.


None of this happens in a vacuum, many of the recommendations are valid but at the most basic level you need to invest in the network and weapons to protect your means of survival.

Of course if you live in a gated community you may not see this yet, but it could be 5 minutes away. Think NOLA.

I don't have the technical knowledge to predict how it will play out but I have the street knowledge to know that it will not be peaceful. LE and/or the National Guard may be able to fill out the paperwork but they will not be able to protect you.

Just as you all are batteling with in disseminating oil info, in the world of finance & economics statistics are; not there, misleading, or out right lies.
Below is a great hit on REAL inflation situation;

Basically says Gov always wants to look good so they enron the books. This adds up every administration until reality is lost.John Williams is a retired banking guy who back tracked this process and exposes truth, (or lesser lies).
Shows we are in recession, inflation @ 6% or higher.

I think you must consider hard asset value deflation as well as money supply you can easily have the money supply increasing while certain hard assets decrease in value simply because of supply and demand. So supply and demand of assets have their on inflation/deflation effect called appreciation/depreciation in inflation adjusted money. For example if oil was abundant and in over supply you have a dropping real price for oil on top of any monetary inflation/deflation effects.

In particular their is no reason you cannot have monetary inflation and at the same time have the real price of housing thats expensive to maintain/own drop in value in constant dollars. This combination of monetary inflation and asset depreciation is particularly nasty since a lot of borrowing power is backed by the real value of assets.

what is the breaking point though???

How much does total world prodution have to drop before the proverbial train comes off the tracks??

In the 70's it wasn't very much at all and things went haywire. This time it could get really crazy since there are so many players and some of them(USA) are not in good shape. If we have a serious shortfall this year, (war, hurricanes, terrorism) things could unravel very quickly. We could find ourselves wiped out overnite, inflation-defflation wouldn't have time to work through the system. We would probably have to build a new one.


Would you care to elaborate?

I think he did -- that was "the breaking point."

Actually, s/he asked why it is that everyone recommends getting out of debt if inflation will just end up eroding all of the debts and making them worthless. It was a really good question; I don't know why shmuu102 edited it away. We already have significant inflation, and I think it's likely to get worse. I can't see any reason to pay off my mortgage now. I'd much rather have the bank lose the money.

sorry, i posted before i read thru the entire thread.....

but my question is still valid i guess.... why pay off debt? why not borrow (max out even) and re-invest in smarter PO savy ventures?

After reading everyones take, i think it boils down to this bet: Will the FED press to keep the dolar value, and default
or hyper inflate to pay off its debts; and how long can the fed surf the line between these two before it has to pick one or the other...

"why pay off debt? why not borrow (max out even) and re-invest in smarter PO savy ventures?"

I do think that's a good question. First, I would make the point that Jeff made earlier, that *fixed-rate* debt is a good thing to have in inflation. Variable-rate debt is just rope to hang yourself with. The problem comes when you consider the chances of deflation, because as Jeff also pointed out, the worst thing to have in deflation is fixed-rate debt.

If you're quite sure that we're headed for inflation, particularly hyperinflation, then it's probably a good idea to load up on debt, *as long as you have income that will increase with inflation*. In that case, your pay is increasing at the inflation rate while your debts are eroding at the inflation rate. Your ability to pay off your debts is increasing quickly.

If you are quite sure we're headed for deflation, then you should pay off those debts now while you're still employed and can make the payments. While your at it, you should probably re-amortize frequently to reduce your payments and plow money faster into the principal.

If you aren't sure which way we're headed, then it's important to diversify and have fairly liquid investments that you can switch readily. If you think of debt as leverage, it's always good advice to be careful with leverage, and don't bet more than you can afford to lose.

Why? He has made his point.

I am pretty sure that peak debt and peak oil will coincide. Once cheap oil is no longer available there is little chance for economic growth unless some alternative source of energy is invented. If people start loosing their jobs or are forced to work for less money to keep their jobs ( it will not matter if the intrest rate is 0%, you will not take on more debt if you are struggling to keep up with the debt you already have. Lowering intrest rates may have helped to spur economic activity back in the day, but I am not so sure it will help this time.

I am no economist, just an ordinary citicen. From my simple wiew a rising oilprice should make all other goods like food, consumerstuff an so on rise in price. Because produktion will be more costly due to higher energyprices, higher freightprices, higher miningprices etc. Real estate should fall in price because few can afford to pay a high price for a house after their payments for food etc.

Then there comes shortages which will drive prices up.

So from my humble citicen wiew there must be higher prices for food and consumergoods, which is inflation for me and other people.


The article and most commenters seem to be on the right track, or at least generally agree with me - peak oil will reduce purchasing power which is the visible effect that most of us call inflation whether or not you're in the Austrian School.

Here's how I see it - oil and gas have the greatest net energy return of any source, even my beloved nuclear power. Any non-agricultural, semi-subsidence economy is driven by energy inputs other than solar-based agriculture and fishing.

If oil and gas reach peak production, more energy has to be expended to keep oil and gas energy flowing. Other sources with lower net energy will gain greater market share. That is, total NET energy declines.

That means that society will have to devote more and more resources to getting its energy and getting less back in return. Even a nuke nets out at less than a Ghawar in its prime.

The corollary is that more and more of society's efforts go into energy production with less left over for consumer goods and service and to economic investment.

For a labor market prediction, many of our super-smart engineers here in Silicon Valley will move out of video game programming or iPod design and into energy related fields, maybe 3D seismic services or controls for nuclear power plants. We'll have energy but at the cost of fewer consumer goodies. The market will help make these shifts happen rationally.

It won't be just labor. Demand for steel, concrete and copper are rising and pushing prices higher. More nukes, more coal plants, more ethanol distilleries, more drilling rigs are driving demand meaning bridges, high rises, and automobiles will get more expensive, shifting consumption from consumables (the good things in life) to energy production facilities.

So long as we don’t panic and go nuts but remain pragmatic and sober, the US and world market economies should be able to make these adjustments. The net result will be a less prosperous world with a lower economic growth rate but it need not be a new Dark Age. I am concerned that calls for carbon caps or taxes because of greenhouse gases or other centralized planning efforts will work against those market adjustments.

So, will we experience something closer to the German Hyperinflation in the Twenties (creditors suffer more than debtors), or the US Deflation of the Thirties (debtors suffer more than creditors)?

I guess one hint is that the US government is a slightly bigger debtor than it was in the Thirties.

As I noted a few weeks ago, Marc Faber said that he expects to see hyperinflation.

Perhaps the US tries to inflate its way out of debt combined with de facto control of the Persian Gulf oil fields, as a way to force other countries to accept rapidly depreciating dollars. Play ball, or you don't get your ration of oil. As Jeff noted up the thread, this could lead to some unpleasant consequences.

Marc Faber's #1 investment recommendation in January was to buy farmland.

Want to know where the Japanese and the French are making their investments?

US nuclear power plants. They are offering essentially, zero down, zero percent financing for new nukes. I can give you a list.

Why? First, in spite of what some commenters say, the USA is still the safest, strongest economy in the world and a great place to invest.

Second, political risk is low. In spite of our seemingly endless bickering amongst elites, it is as bad or worst elsewhere. The rule of law prevails and is expected to continue to do so and one can expect that contracts made will be honored. Can't say that about Russia or Venezuela

Third, major non-fossil electric generators with proven technology and high capacity factors will be solid money makers in the years ahead, especially in deregulated electric markets.

I agree that we are headed for a never ending energy "boom." The problem is the gargantuan debt that we have that is predicated on a constantly expanding supply of cheap energy.

IMO, in the days ahead it will be much better to be a net energy (or food) producer than a net energy consumer.

Marc Faber wrote an interesting book called "Tomorrow's Gold" that covers much of this discussion, with historical perspective.
What's interesting is that Marc Faber believes that we're heading toward hyperinflation although he's not a peak-oiler. He's coming from the opposite perspective, call him a demand-oiler (demand will overwhelm any supply available).
Here's what Dr. Faber said about oil in 2004:
"But here is the scary part. Despite its rapid growth, China's per capita consumption of oil is still just a tad north of one barrel of oil per year. Moreover, the entire Asian region with 3,6 billion people or 56% of the world's population and the world's fastest growing economies of China, India and Vietnam still only consumes 20 million barrels of oil per day, which is less than the US consumes with 285 million people."
his commentary can be found monthly at- or at his website (subscription)-

Actually, I'll take door number 3 - a repeat of the 70s. Except this time as Bob should be around to point out, we've already begun the Three Days of the Condor scenario. Since wars tend to be inflationary, I'm expecting stagflation with more -flation than the stagflation of the 70s.

You de facto control of Persian Gulf oil makes sense. Two months after the US went into Iraq their oil was switched from Euro trading back to US$ only trading. As you say, this may well lead to some unpleasant consequences - interesting times!

What does this whole problem mean for the US, since it declared bankruptcy in the 30s?

"You can never solve a problem on the level on which it was created."
Albert Einstein

As I have said before, I think that almost all of us, to some extent, are in Peak Oil Denial. I have often thought about how quickly circumstances can change one's reality. For those of us in the Oil Patch, the collapse of oil prices to $10 per barrel in 1986 comes to mind.

But an interesting story is what happened at a criminal trial, where my wife was selected for the jury. The jurors had just been sworn in and were supposed to select the foreman. Almost everyone was bitterly complaining about being selected for the jury, but one businessman in particular was especially vocal. He said the trial was a "waste of time" because the defendant was "clearly guilty." The bailiff overheard this comment and relayed it to the judge.

The judge asked said businessman about his remarks. He repeated his assertion and said that he could not afford to take a week away from his work. The judge asked the businessman if he were aware of some of the facts to be presented by the defense, which the judge outlined, and the guy said no.

The judge then declared a mistrial, and sentenced the businessman to one week in jail for contempt of court. As the businessman was being handcuffed, he was heard to say "I can't believe this is happening to me," to which the judge replied, "Sir, I assure you that it is."

Think of how this guy's whole situation changed in a blink of an eye--from a self important businessman, to just another inmate sharing a jail cell.

I think that a lot of Americans are headed for some kind of "I can't believe this is happening to me" moment.

Euro hits more than 2-year high
ECB will 'very closely monitor' price stability
By Wanfeng Zhou, MarketWatch
Last Update: 2:12 PM ET Apr 12, 2007

NEW YORK (MarketWatch) -- The euro rallied to a more than two-year high against the dollar Thursday, after the head of the European Central Bank signaled that interest rates in the euro zone will rise in the coming months.
The dollar fell across-the-board on concerns over uncertainties in U.S. economic growth and as traders positioned themselves ahead of the upcoming meeting of Group of Seven finance ministers in Washington over the weekend.
"The combination of robust [eurozone] growth and rising interest rates is fuelling the single currency," said Ashraf Laidi, chief foreign-exchange analyst at CMC Markets in New York. Meanwhile, "the dollar's shaky foundation goes from bad to worse" as the currency "remains overshadowed by the risk of further slowing at home and robust abroad."

In New York trading, the dollar was quoted at 119.01 yen, compared with 119.31 yen late Wednesday. The euro stood at $1.3476, compared with $1.3429. In intraday trading, it had risen to $1.3503, the highest level since January 2005.
The British pound traded at $1.9775 vs. $1.9754. The dollar changed hands at 1.2169 Swiss francs, compared with 1.2205 francs.
The euro fetched 160.42 yen, compared with 160.28 yen, after rising to a new record high of 160.85 yen. See live currency rates.
The Dollar Index, which tracks the dollar against a basket of the world's major currencies, fell to its lowest level since March 2005.
The Frankfurt-based ECB on Thursday held rates at 3.75%, as expected, after a quarter-percentage-point hike in March. The ECB sets interest rate policy for the 13 countries that use the euro as their currency, from Germany to Slovenia. The central bank has gradually lifted rates from a low of 2% in December 2005 as the European economy has improved. See separate story.
'Very closely'
At a post-meeting press conference, Jean-Claude Trichet said the bank will continue to monitor inflation risks "very closely," and that wage increases remain a significant risk to price stability.
The euro briefly came under a bit pressure as Trichet held back from using the phrase "strong vigilance," which would have likely indicated a further hike in May. Instead Trichet said monetary policy continues to be "on the accommodative side."
Trichet's comments are "mostly less-hawkish, but this is not very much out of line with expectations" said Brian Dolan, director of research at, a division of Gain Capital. His language "tends to indicate no rate hikes are planned in the immediate future, probably two months out at the minimum," he said.
Kathy Lien, chief strategist at, said while Trichet's comments raised doubt for a hike next month, the European Central Bank "is still on track to raise rates one more time this year."
CMC Market's Laidi viewed Trichet's decision to leave out "vigilance" as "tactical" due to the strength in the euro.
"Using the term 'vigilance' would have been received as a guarantee of a May rate hike, thus risking further elevating the euro from its current two-year highs," he said. "Today's change of rhetorical tack does not preclude a [second-quarter] rate hike, it only means the ECB is being cautious with the rising value of its currency."

Regarding the debate about PM:s. I believe, that when you have payd off debt, bought the stuff you need Post Peak, and still have savings left, then one should buy gold.

Gold is money that cannot be printed, and has been money in 5000 years, you can use it around the globe.


This is why I created to help all the freaked out drivers when they are reeling from shock. How long they keep paying their INTERNET bill is the question many people should be asking.

Without a communications infrastructure, people will need to rely on their immediate locale, and not many people know their neighbors to share cups of sugar or garden tools.

I work at a large media company, and see the pulse of the economy through advertising budgets. Right now, the growth category in advertising is for mortgage brokers and bankruptcy lawyers.

Car Dealers have a glut of used-trade ins on the lots and aren't moving enough new cars as is. Credit cards ARE maxed out, and consumers now have to pay their mortgage, their HELOC, credit cards, groceries, gas, utilities and then any extra income for that cool new Plasma TV.

No matter what happens to the dollar, the point is that we are already so in debt there will be families in the streets, it's already happening, and the first wave of economic refugees are staying with family & friends while they watch their foreclosure become reality.

I see the trend of "Tribing up", with Gen Xer's and Gen Y moving back in with mom and dad, and the family working together to pay the bills.

I see Victory Gardens making a quick return, as well as localized startups for making fashionable new clothing from existing resources (frankenshirts), and maybe bartering that in exchange for the surplus produce grown from people's lawns.

Community Supported Agriculture will become the normal way to get groceries, Home security systems will skyrocket in affluent areas, and carpooling will be forced upon the masses so long as they haven't been "relieved" of their work commute.

Yee haw kids, it's gonna be a doozie!

If we have a significant decline in oil, I think what we should expect peak real GDP - that is, a peak in the quantity of goods and services that the United States produces, apart from any discussion of the value of money.

Each of us living in the new smaller economy is likely to have less and less, since there is less and less in total.

How this plays out in terms of inflation/deflation is not entirely clear. I think there is a real possibility that the monetary system will simply break down altogether. Many of the people and companies that have borrowed money when real GDP is increasing will not be able to pay back their debts, once the economy takes a sharp turn for the worse. The whole monetary system then goes down, and needs to be replaced for something else - perhaps more barter related.

An alternative possibility is that the government effectively guarantees the massive amount of debt that would otherwise bring the system down. This greatly increases the monetary supply, and creates massive inflation. In this scenario, the net result may be a monetary system that is barely useful. What foreign country would want to trade/purchase bonds from a county with massive inflation?

I would say that eventually millions of people just wont pay their mortgage anymore. They can't throw everybody out!

It'll be a popular grass-roots movement I'll wager.

I am so glad this thread happened now. In my own research into mitigation of peak oil the lack of a stable monetary system turned out to be the number one problem. How we mitigate is a distant second. Right now I think that any attempts to create a post peak economy cannot succeed until we create a post peak monetary system this will not happen without a crash.

We might build some things that are valuable post peak but until the dust settles know one knows. In the interim I'm now focused on saving my own butt the world be damned. I think including renewable energy resources that you personally own should be a prominent part of such a strategy. So for mitigation I'll try and focus on approaches that work for small groups and communities. If you can get your cost for necessities to zero you can focus on using earned income for improvements and a few nice bottles of wine. Advocating electric rail/trolleys for the larger regional community is also worth while. Outside of that forget it.

This does mean if you create good local renewable methods you can make a nice profit but anything that tries to maintain or centralized interconnected economy is probably doomed.

Crude oil is the highest quality energy capital we have.

As I have previously pointed out, during Bush's first term, worldwide we used 10% of all the crude oil that has ever been consumed, and based on our mathematical models, in Bush's second term, at our current rate of consumption we will use 10% of all remaining conventional crude oil reserves.

Matt Simmons is predicting that oil prices, in constant 2005 dollars, will be at or above $200 per barrel in 2010.

I have defined a new unit. One "Simmons Unit" = 5 MMBO X $200/BO = One billion dollars in gross cash flow to the royalty and working interest owners, before operating costs.

There is a reason they call it black gold.

I agree with the peak real GDP part, but I can't see any reason for a near-term breakdown in the monetary system. The financial system didn't break down in the Great Depression, the stagflation of the 70s, or any other period that I'm aware of. It didn't break down in Argentina or other countries hit with financial turmoil recently either.

The financial system is one of the ways that TPTB maintain control of the reins of power. While it may certainly happen that they eventually lose their grip, I expect the rich and powerful to be in charge for at *least* a few more decades, even if oil production falls quickly and they have to use the military to enforce order.

I hope you are correct. But what is ahead is a whole lot worse than the 1970s, and even the depression. In the depression there was a time when people could not get money out of banks. This is also what happened in Argentina when they had their crash a few years ago. I'm not sure exactly what happened in Russia in their crash, but their drop in oil usage was more similar to what we are expecting than our minor ripples of the 70s.

Banks now have the FDIC with "insurance" to $100,000, but there is really little money in the fund to back up this insurance. If there are a lot of defaults, we are either back to bank failures, or the government "printing money" to prop up the banks.

Insurance companies have some guarantee funds, but they generally assess the solvent companies to pay the debts of the insolvent ones. Once a substantial number of insurers become insolvent, the system fails, and a government bail-out is needed.

Another key difference is that this time around the dollar is a fiat currency; there's literally nothing to keep it from blowing up.

Technically stagflation isn't inevitable. If you can keep the money supply roughly in line with the true size of the market then you should be able to keep inflation minimal even as the economy shrinks. This means also shrinking the money supply, for instance, through raising taxes that are used to pay off the national debt (destroying the money/taking it out of the system). Painful politically but mechanically plausible.

great article - well thought out. I have been hoping someone would post this kind of article.

I am frankly mercenary and I have been trying to figure out how to profit from "Peak Oil" here is my thinking.
Any financial asset is a loser due to global competitive inflation (money printing) to keep all currencies level with declining US dollar. Relatively.

Then how about energy companies: - but they have declining resource bases and steadily increasing cost of production so their profits will decline, then crash when their fields decline. One analyst in Barrons gave Exxon till 2012 as an example.

The big issue I think is the global liquidity bubble - with derivatives, it is far bigger than I think anyone really understands. There is a great book called "Devil Take the Hindmost" and another called "Manias, Panics and Crashes" which are histories and analyses of bubbles and panics. Uncontrolled credit creation is always at the root, and credit contraction is always the result.

When you look back over 5000 years, gold and silver have always been the universal form of money. (three definitions of money: store of value, means of exchange, unit of account) It has only been for the past 35 years (since 1971) that the world has had no connection to precious metals. This has allowed politicians and bankers to do what they want, and we have had a steadily increasing number of crises and panics worldwide.

So, I think a perfect storm is brewing - Peak Oil will be the straw that breaks the credit bubble. The US dollar will no longer be the world reserve currency. And with the debt levels, this will happen at the worst time. The Fed

So: I think that we will have a grinding, twenty year, inflationary depression. It will take that long for the energy situation to adjust to new fuels and the world to new systems.
It will also take that long for the global debt problems to work themselves out.

One piece of good news: The war in Iraq will resolve itself. The US will be crippled economically and will have to retrench its military globally. The civilized debate going on in the US about "the right thing to do" in Iraq will end real quick. This will leave a void, and the US will be an "wounded animal" likely to lash out - so very nasty "police actions" are likely.

I think the only answer is precious metals.
They are radically undervalued now, and they provide ultimate security. They have always been valued and will always be valued, everywhere.
Take care of your family
Think Global and Act Local

I think your wrong about precious metals. Never assume history will repeat the past. The real store of value in the future will be energy or durable goods. Gold may or may not be used to represent money. I happen to doubt it will again be popular since we don't need it. What I think we will have is indexes against both real assets and energy that are used to back money. Uranium makes a far superior store of value in this sort of economy so the main value holder may well be uranium.

I think the gold bugs are in for a nasty surprise as gold is bypassed. If you really want to do precious metals by platinum. Its another possible store of value because it will always be in high demand if we have industry. Silver also to some extent. In any case whatever we end up with it won't be based on gold. Feel free to buy your gold but I think you will find your choice horribly wrong and platinum is a safe bet if you want to buy precious metals.
Why would you advocate gold over platinum ?

It is, as they say, a free country, and people make their own decisions. All I have to go on is 5000 years of history, everywhere in the world. The Incas, Japan, and Europe, who developed completely seperately over thousands of years, all used gold as the ultimate store of value.
We in the post war west have become so familiar with fiat currencies over the past 50 years, we do not understand gold.
In WW2, the only way Germany could buy resources on the black market was with gold.
During the 1930s Depression when the government became worried about social stability, Roosevelt confiscated all gold. Interesting - not guns, but gold.
When people get really worried they always go to gold.

I hope I am not a Gold Mystic or a gold bug
It is a tactic.
The SP500 will become a good place to invest again, and when it does, I will switch back to financial assets.

Actually on second thought buy all the gold you want I think platinum is a stupid investment and can't recommend it.
Your right. And please convince anyone you know that golds a much much better investment than platinum.

Wouldn't hurt to invest in some gold. But I wouldn't put everything into it. Diversify, diversify, diversify.

That guy who wrote about the Argentina collapse said gold was still valuable, but recommended buying a bunch of cheap wedding rings. He said when you took the gold to be cashed, they gave you the same amount in return, no matter how large the piece was. Small, cheap wedding ring, large investment-quality gold coin, fancy gold jewelry - you got the same for each.

Gold may hold its value better than cash, but that doesn't mean it will be a good investment. During the Great Depression, rich people bought up assets for pennies on the dollar. If there are few buyers, and a lot of sellers, the value will go down, no matter what it is. And gold is not exactly rare in our society. It's not like the old days, when it was precious and relatively rare, at least among the masses. Everyone's got gold now, even poor kids in the inner city.

I'm thinking the same thing. Most people don't know anything about gold -- coins, jewelry, etc. --, and would be hard pressed to figure out how to use it as "currency."

Also, in a jam, people will be selling their gold, silver and coins for cash, to buy bread and pay thier mortgage. In a liquidity crunch, all assets may drop in value, as the crush is on to raise cash to pay off debt to avoid foreclosure.

Just remember that famous photo from 1929, of the guy in spats in front of a beautiful car, with a "for sale, $100". A crowd of onlookers, no buyers.

I will suggest that there will be two time periods/scenarios when precious metals will be sought after.

The first would be an inflationary period where the financial system is still functioning but people are seeking an inflation/currency-depreciation hedge. That happened after the '73 oil shock and is happening now.

The second is in conditons of feudalism/warlords/failed state. Barter is inefficient; there are occassions when a "medium of exchange/store of value" is worthwhile (you have a perishable surplus after harvest, you wish to trade with people far away, etc) So I think US silver coinage will allways be pretty widely accepted in North America.

Why is gold is gold valuable in the second scenario? Why has it been accepted as valuable across 5000 years and many cultures? Because it is soft and easy to fabricate into adornments that have pleasing, warm colors and will not tarnish or turn your sweaty skin an unattractive color. Why is that important? Because those adornments denote status, for the purposes of prestige and competitive advantage in getting desireable women. Before you laugh, consider this: that McMansion is Mr Bower-bird in action, intended to compete with other males and attract desireable women. That honkin' huge SUV may cost more, but it's much more competitive for intimidating other males and impressing women than is a subcompact. Humans have squandered oil in service of deep, instinctual urges and when the oil is gone they will use gold for the same purposes.

"Why would you advocate gold over platinum?"

I can think of a few reasons:
- Platinum looks a lot like silver, palladium, and white gold.
- Yellow gold doesn't look like much other than gold and iron pyrite, and it's pretty easy to tell the difference.
- Fairly pure gold looks like gold and can pass the "bite" test.
- All the precious metals have uses in industry.
- There's a reason Fort Knox is full of gold, not platinum.
- There's enough gold and silver in the world that we could probably use them as currency again if we had to. How much platinum is out there?

Frankly, I think good land will be a better investment than precious metals. And Leanan has it right: diversify, diversify, diversify.

> always be in high demand if we have industry

isn't the end of that industry one of the rather obvious outcomes of the decline and crash in energy production?

I think the people with guns and nuclear reactors will be very interested in platinum. They can easily trade lead for gold.

When the economy has disintegrated that much, what good will
the nuclear reactors be, and what good will the platinum be?
Again, without a smoothly functioning economy, there will be
no point to operating industrial facilities- not to mention
that it will be nearly impossible to anyway. If people
are trading lead for anything else in such a fashion, who's
going to sit around and leisurely go to work to earn a salary
and buy products? If things are so peaceful that people would,
then who's going around trading lead for gold, so to speak?
It either collapses or it doesnt- and, being a positive feedback loop, it continues precisely up to the point where
it can't anymore, and at that point, it's collapse. In
practice, the whole process is happening over a period of some decades- we're well into the process already- and the collapse
itself becomes a positive feedback process while there's
still more room below to crash. There will not be people riding suburban trains to their post-automobile-economy jobs, powered by nuclear power plants and filled with pastel
colors. It is going to be lights out, and pretty messy in
the process.

I do not see why we don't go back to city states agian its a very stable form of government this time around they have no reason to give up on technology in fact a non-technical city state would be swallowed. Nuclear power ensures electricity supply and of course some atomic weapons for protection from other city states so all of them would be in a effective truce except for skirmishes at the edges of their empires. These city state will have a different concept of who is a citizen and who is not. Most people will be disenfranchised. Inside these city states you can expect scientific work to not only stay at the level it is today but probably accelerate. Fusion research for example and certainly military research on weapons and counter weapons. Robotics computers etc etc.

Periodically one may weaken enough to allow a successful preemptive strike or become so economically weak they cave in to a nearby state for protection.

Who knows but I see nothing about what we are saying about economics will prevent the creation of these states initially by rule of the gun and later by nuclear protection. These places will certainly control the local money supply including gold by whatever means required.

I posted earlier I'd expect to see two currencies exist. One a local script for non-citizens ( aka slaves ) and one used for intercity trade or the elite citizens. Expect gold to be restricted since by allowing the slaves only local script they basically can't easily run to nearby states not that their lot would be different people without advanced skills would be worth little in this society.

Time to read up on how the Greeks did it with their city-states...worked for awhile I believe.

I always like their concept of multiple deities as well.

Now, which existing US State would be equivalent to Sparta and which would be Athens?

I've been thinking about that. The problem is we have big cities surrounded by urban sprawl in the best places to put cities. Trying to remove suburbia and restore the farmland is a daunting task and a decayed urban/suburban landscape is almost impossible to defend to many hiding places. My best guess is that outlying smaller towns will actually grow to be the cities of the future with the current ones mined for resources as the outlaw population drops from disease etc.

Climate change will throw a big money wrench in this since we can expect the obvious place to retreat to the Midwest to dry out and have unpredictable weather. In 10-15 years when I think this sort of thing will begin to form GW will begin to have effects. My best guess is still a regrowth along the Mississippi river valley system. I'd have to guess the major sea ports will remain but anything thats not on a navigable river or close to a seaport or a rich agricultural area is probably toast even in the case of agriculture I could see it restricted to areas with navigable rivers for a long time.

I'd be looking for small cities along major rivers that don't have extensive sprawl and have places that a river port could be placed. Remember their is a good chance that we could loose a lot of the lock and dam systems so its not clear at all what really navigable esp with climate change.

Sparta has to be Boston if friendliness is the factor :)
Athens is of course San Fransisco/Bay Area or I should say they think the will be.


I think gold will be okay, at least at first. The first phase of the deleveraging of the current asset bubble (stocks as well as housing) will be a catastrophic market crash. It will go something like this: The Bank of Japan is finally forced to raise interest rates because of rampant and sudden speculation in its urban real estate markets, the value of the yen soars, and the massive carry trade (borrowing yen at 0.5% interest to buy U.S. Treasuries at 4.7% interest) goes boom. The dollar collapses and takes the equity U.S equity market with it. People associate this correctly with the implosion of our unsustainable credit bubble but not immediately with the even larger and more intractable problem of peak oil. They know they are in deep trouble but not that they are about to starve. This creates a crisis in confidence in all fiat currencies, which should lead to a rush into gold.

The emotional appeal of gold in major economic crises is its unfettered reputation as a reliable repository of value. Historically, it has been the value repository of choice during painful transitions between empires (British to American, and, soon, American to Chinese). In this regard, platinum, silver and uranium are all second bananas. All have a practical industrial value that waxes and wanes with economic conditions. Plus, gold is probably the only metal with the storage and investment infrastructure sufficient to accommodate a panicky rush to hard asset value by individuals and central banks. Individuals can buy fractional interest in actual bars of bullion from reputable outfits like, or they can purchase futures contracts through the highly liquid streetTRACKS Gold ETF GLD. To some extent, you can do the same with silver - but try buying uranium. You have to drill down to uranium mining stocks. At the central bank level, as China shifts out of its rapidly depreciating dollar reserves, gold will be one of its best options.

As another commenter pointed out earlier in this thread, gold is highly impractical and unappealing to lug around as a medium of exchange. (You want to give me gold for my ear of corn? Yeah, right.) But that's the second phase of the crisis, when we devolve to a localized barter economy. In the first phase, before people and countries connect the dots between the market's sudden crash and the grinding long-term reality of peak oil, gold will likely seem an irresistible alternative.

Yours is very logical thinking. In the early phase, or the hyperinflationary phase IMHO, gold will be quite valuable as people lose trust in the US dollar and other fiat currencies. But as the next phase of economic collapse sets in, we are likely to see severe deflation. Once the deflation sets in, you really want to be holding valuable, tradable assets such as food, energy, medical care/supplies, shelter.

For 6 years, I've been watching our government spending money like there is NO TOMORROW. Early reflections always resulted in the observation that "they don't seem to care that they are bankrupting our country, our children, our grandchildren, etc." Later reflections became "They don't care....period. They know that our financial condition is of the 3rd world type, and peak oil will be the nail in the coffin." About the time I came to that conclusion, that they truly don't care, there was a study/paper out of Europe (I believe) that opined something to the effect that "it may not be profitable to slow/mitigate the effects of peak oil." Wish I could remember the details and/or had a link. IMHO, it pretty well sums up where I think our government is taking us. No mitigation, raid the US treasury for yourself and your cronies, eventually default on all US debts and imprison any of the population who dare to rise up.

With Simmons, Bartlett, and Udall all speaking up (AND having the presidents ear), it is impossible for me to believe that all of our leaders, reps, and senators at the federal level are not peak oil aware. And yet, there is no mitigation except for the mouthing of a few sound bite regarding addiction. The accumulated wealth of "we the people" is NOT going to be used for mitigation -- rather, it is already gone.

And no, I'm not proposing that they are all involved in some conspiracy. I'm just saying they'd have to be deaf, dumb, and blind not to be peak oil aware and aware of the mitigation that is needed. Yet they continue to throw our collective wealth away by the billions. No conspiracy, they just don't care. As Stan would say, "Don't care."

HI Cheryl,

Thanks know, I'm just not so sure. At the end of the day, people have their very individual personalities and backgrounds, and many (many) defenses...just think about personal/private behavior v. public behavior, to get an idea of how difficult it can be for most people to understand themselves, let alone the implications of "peak".

I joked with people many years ago that the best replacement for the gold monetary standard, obviously quite obsolete, is an oil standard or a uranium standard.

Not so funny, now is it?

But what is platinum used for? Seems that the primary use is in chemical catalysts, and these are in heavily petrochemical oriented industries: refineries and automotive catalytic converters.

If oil gets really expensive and the petrochemical consumption industry goes down, is platinum such a good store of value?

Uranium becomes valuable in exactly such a situation.

on the other hand, uranium is not very rare, from the Wikipedia chart it appears to be more abundant than silver, much less gold.

Platinum is basically used to make everything except where cheaper metals can be used. Need a reaction to work add platinum. Half the chemist in the world spend their time figuring out how to not use platinum. I'm exaggerating but you would be surprised how close to the truth these statements are. Another important catalyst is Palladium. Platinum/Palladium are the synthetic chemistry equivalent of oil for our society. In a sense they are equal in ensuring you can run a modern society. Even if we switch off oil these will always be valuable as long as we manufacture chemicals. In fact if we go to other energy sources and thus new organic inputs I'd suspect the demand would go up for these.

In any case the demand for platinum is completely controlled by demand destruction from the limited supply. I.e if you can afford to use it at its current price you will and if you must your customers will pay the cost if they need your product.
The economics of platinum should be interesting from a peak oil perspective since its always been a market where potential demand was well in excess of supply.

Notice how supply and demand are in almost perfect lockstep no matter how much platinum is produced.

The reason I see platinum as potentially being very valuable is it would be in demand from people that still have a industrial civilization which would be the people you would have a lot of interest in striking a deal with. The same of course with uranium to some extent.

So the value really comes from being able to sell something to the richest people.

As far as a store of wealth goes platinum blew gold away.

But I hope the gold bugs will keep up the good work and keep people from buying platinum. Actually is so precious if people did try to horde it open trade in platinum would probably be suspended.

A place to store value becomes useful only after all your needs have been fulfilled. Additionally, you must be able to satisfy your needs in the future too, so it is better to invest in the capacity to do that. Thirdly, the bang you get for your buck depends on what excess goods and services are available, and who wants to trade them for a piece of heavy, soft metal. I'd rather be worried about a strategy to generate value, rather than to store it.

So the redeeming quality of noble metals might be the fact that they are shiny. Nice for the wife and/or the kids ;).


I think your assessment of a 20-year, grinding, inflationary depression is about right--that is probably what it will take to recalibrate the larger economy. I don't like energy companies for the reasons that you point out. My favorite play in the traditional markets are long-range, near-the-money oil options (but I'm biased because that's what I already hold), however, I think the best overall "investment" is the economize-localize-produce model that Westtexas suggests. I don't see Peak Oil bringing on a new age utopia, but I do think that localized, particularly individualized production of food (gardening), energy (woodlot), and water (rainwater catchment) would be wise. I'm not confident in the value of precious metals--I agree with Leanan that diversifying a small part of one's assets into gold, for example, probably won't hurt. However, I think that IF the situation gets so bad traditional fiat currency is of no value, then items with intrinsic value (food, tools, etc.) will be the best store of value. I don't agree with the conventional wisdom that gold & silver have "intrinsic" value--or at least that the intrinsic value of something that can make shiny jewelry is anywhere near the price. Gold has value as a currency because it is very dense, transportable, difficult to fake, etc. The majority of its value--at least in my opinion--is a psychological derrivative of those attributes. In a true crash scenario, maybe that psychological value holds up, maybe not--after all, you can't eat it! That's certainly a contrarian view, so take it for what it's worth :)

I moved my debts into dollars, and my assets out of dollars. So far my debt - measured in euros- is melting like snow in the spring sun.

A prerequisite for the use of gold (or anything else) as money is a functioning economy. If there is not much trade, then there is not much you're going to buy, with gold or dollars or
big stone disks on the isle of Yap, for that matter. Gold is
pretty, it is durable, it is scarce enough and plentiful enough, it is hard to fake and easy to identify, it has all the criteria of a good money, yes- but
another necessary ingredient for any money to work is a market.

There seem to be a lot of people who think that the post-peak,
post-industrial world will be like a pleasant second take of
the 19th century european and american experiences.. This is
a highly unlikely outcome. Most of the world is headed into
the iron age (and eventually, into the stone age), by way of
a couple decades of very unpleasant, tumultuous, dangerous
rearrangement. The complexity and long-range interconnectedness of economic activity which characterizes
the present is already coming apart at the fringes and when
it does, trade will be getting ever more local. Long range
trade will have to re-emerge, if it will, on its own after
things settle, which will take years to decades depending on
where you are- and in the mean time, you can't eat gold.

While major markets still operate, gold will probably function as a high-quality currency, I agree. However,
as those markets run out of steam, one had better be busy
thinking of what to spend that shiny yellow stash on,
because some years after that, rice and bullets will be
far more valuable.

What I have noticed is how those "experts" of finance and politics seemingly ignore the laws of biology, chemistry, and physics in their arguments. The solutions to every economic and political problem are deeply rooted in the hard sciences. Men argue but nature acts and the willful defiance of natural phenomenon has put us in this pickle. The best times for us at the financial bottom was in the early 1970s which also happened to be when per capita peak oil occurred. Nothing in the economy happens without the use of fuel in some form. As the per capita supply of oil has dropped global poverty has increased. The elites have always turned a blind eye toward the poor so they have failed to invest in renewable energy until recently and then at a very small level. Their control of governments has kept the price of fossil fuels too low to make renewables a more atractive investment. Renewables are more labor intensive and geographicly dispersed than fossil fuels. This has kept them more expensive than fossil fuels. Whether there is inflation or deflation in the near future energy will be more expensive relative to everything else. OTOH a switch to renewables will employ more people in more locations and will provide customers for everyone else. Those who turn to more energy efficient ways of doing business now will have the advantage. Those who don't will go belly up.

The purchase of gold and/or silver is not without its potential pitfalls. None the less, if one has some excess fiat savings -- above and beyond one's other real asset and PO diversification/mitigation prep investments -- that one wants to protect against monetary inflation and concurrent devaluation of one's fiat currency, then and only under such circumstances is it is a sensible investment as a good hedge for store of value in these uncertain times.

Having said that, such an investment should not be undertaken lightly. One should have some understanding of this PM market in order to best decide when and what to buy; a willingness to not lose sleep over its heavy handed market management and short term volatile price swings; and last but not least, a firm willingness and awareness of when in the future it should be sold off.

To just imagine that it will one day be useful as a common means of exchange is not a sure thing. It may very well be so in some areas or ways. But on a day to day, people to people, goods/services for good/services bartering type scenario that a lot of areas and people may be reduced to, gold and silver's monetary worth may be largely negligible or absent. Hence my advice about staying alert to gauging when to sell it too; particularly if one is holding a lot of it.

If it is simply a matter of buying and holding a few thousand dollars worth of gold or silver coins, there is no harm in it. Just be aware that it may not prove to be of much real value for simple exchanges.

No one can know for certain how the future will in fact turn out, and whether or not gold and silver is used again as a means of accepted monetary value in commerce and the exchanging of goods and services.

In the worst case future of doom envisioned by some it will probably be pretty worthless, except for any strong-arm type survivors who care to adorn their women with something pretty.

Should things not get so out of hand it is also conceivable that from the wreckage of our collapsed global fiat backed economic system that gold and silver could well regain acceptance for backing the settling of trade.

The plain fact is that no one can predict with any certainty which way we will go. Depending on the speed and scope PO and its economic underpinnings unwind, some places are sure to go to hell in a hand-basket and other ones manage better off. Like everything else about our life and times, the best one can do is to try and make informed choices. Buying gold or silver is one such choice that no one can prove as being stupid or smart until much later on.

As part of a large and diversified ELP plan, and as an interim means of salvaging excess savings in inflationary times, I think holding PMs has some merit. Yet it's not something I recommend anyone entirely bank on to save one's bacon. As others have advised, knowing a wide range of practical powerdown skills, on good land or in a good community to put them them to use will, one hopes, prove more useful.

With or without gold, here's to best hopes for a functional human future at all.

Another note there - I'm not sure if anyone else mentioned this earlier - if you do purchase silver/gold/platinum, you might wish to consider the advantages/disadvantages of owning the real thing over simply owning them on paper, so to speak.

Personally I like silver. It has been a monetary unit for 1000s of years, used in medicine for 1000s of years, used as jewellery for 1000s of years... oh, and did I mention that I hate werewolves? ;-)

"You can never solve a problem on the level on which it was created."
Albert Einstein

The authorities will certainly prefer to inflate if they possibly can.

Question is can they?

The case for deflation comes from the enormous overhang of debt that is out there - not just from the US - virtually every country uses unbacked currency and creates new money or meets old obligations by issuing new debt.

If we get into a cascade of debt repudiation, and there are many ways to get there, we may have no choice.

Its also possible we will get both, probably inflation first and then deflation followed by revulsion of the currency.

This has happened before. There is no case in history that I know where an unbacked currency has been successful.


A couple of observations:

1 - This appears to be a "doomer" thread :)

2 - To summarize most of the fortune-telling up thread, Before Crash(BC)=inflation, After crash=Deflation(AD)

So what causes "Crash"?

It could be one or many of the following: stock market crash, terrorist event, weather event(s), War with Iran, a run on the US Dollar

It could happen tomorrow...

Thank you for your replies. I can clearly see that there is certainly the chance that gold and other metals could be seen as useless in the future, but some form of monetary exchange will be needed. Maybe that will be barter, or some other medium of exchange that we have not considered. We have been functioning in a certain paradigm, a paradigm that has it's own logic. The paragigim has created the present situation in which we find ourselves, and more of the same paradigim will not create something different. In the final analysis I feel that what is of most value is the development of community. Let us for the moment consider a situation where things collapse economically and you are on your own. You will need food and shelter on a somewhat consistant basis. How do you accomplish this? No man is an island. There are those who think that they can function without interacting with others, but the fact is that you cannot function without the assistance of others. We all need each other whether you like it or not. The future is no different. What needs to transpire now is a willingness to move into that new paradigim. However there are those who insist on their own ideas as to what that should look like. It will require a tremendous humility, a profound willingness to change ones way of being on this earth. For those who insist on how they feel things should look, they will isolate themselves and die. There is somthing common about us, and that is the common ground that needs to be embraced. Without this we are lost! I so appreciate those on this blog! Here are those precious few who are exibiting a willingness to move beyond the old and embrace something new. Keep moving ahead, delve deeply into the present state of conciousness. Be brutally honest with how you function in your life, the affairs of your life, the interactions with those who inhabit your world, and we may have hope for the future.

Hi Prof. Goose,

This is an excellent start on the topic. I'm only an arm chair economist, but like everyone else, have an opinion. To engineer inflation in a deflationary environment will require an uptick in deficit spending. You pointed out entitlement payouts and they would have to come without a balance of taxation. You also mention open market operations to increase the money supply. Here I would point out that it only creates excess reserves in the banking system and does not provide incentives to borrow, or even incentives to reduce lending requirements. It could have the effect of only pushing on a string. The money supply is only grown by the issuance of new loans in the banking system. This is an important fundamental of how the system works. The Great Depression occurred because of the previous bubble in non performing loans during the Roaring Twenties. The same thing happened to Japan. Consider that Japan still had a powerful economy with strong export businesses. It was during a period of cheap energy. But the BOJ could not pull Japan’s economy back into inflationary growth.

Commodity inflation does not, contrary to common belief, create monetary inflation. For example, consider a doubling of gasoline prices from today. The urban sprawled commuter will have to sacrifice other spending to make it to the day job. This causes contraction in the business cycle, less borrowing, less money creation. The sprawled property values also come under pressure, another source of liquidity dries up. More importantly is the value of underlying assets that are used to create money, diminish.

We are already in a situation where asset values are on as shaky a ground as they were at the end of the Roaring Twenties. Deflation is the real threat facing our economy, not inflation.

A note on the thought that the U.S. will suffer this alone in the world. It won't. Japan is just hanging in there and seriously depends on exports to stay afloat. China's banking system is sitting on some $750 billion in non performing loans. That is a huge number compared to their GDP. It only gets papered over with their 10% growth rate. Current account deficits in Euroland are no better or worse than ours. No, this is not just about the U.S., the whole world is in on this.

Best, Dan.

Read the following:

Ravaioli: But there are many other environmental problems ...

Nobel Laureate Friedman: Of course. Take oil, for example. Everyone says it's a limited resource: physically it may be, but economically we don't know. Economically there is more oil today than there was a hundred years ago. When it was still under the ground and no one knew it was there, it wasn't economically available. When resources are really limited prices go up, but the price of oil has gone down and down. Suppose oil became scarce: the price would go up, and people would start using other energy sources. In a proper price system the market can take care of the problem.

Ravaioli: But we know that it takes millions of years to create an oil well, and we can't reproduce it. Relying on oil means living on our capital and not on the interest, which would be the sensible course. Don't you agree?

Nobel Laureate Friedman: If we were living on the capital, the market price would go up. The price of truly limited resources will rise over time. The price of oil has not been rising, so we're not living on the capital. When that is no longer true, the price system will give a signal and the price of oil will go up. As always happens with a truly limited resource.

Ravaioli: Of course the discovery of new oil wells has given the illusion of unlimited oil …

Nobel Laureate Friedman: Why an illusion?

Ravaioli: Because we know it’s a limited resource.

Nobel Laureate Friedman: Excuse me, it's not limited from an economic point of view. You have to separate the economic from the physical point of view. Many of the mistakes people make come from this. Like the stupid projections of the Club of Rome: they used a purely physical approach, without taking prices into account. There are many different sources of energy, some of which are too expensive to be exploited now. But if oil becomes scarce they will be exploited. But the market, which is fortunately capable of registering and using widely scattered knowledge and information from people all over the world, will take account of those changes.

Friedman won a Nobel prize in economics. These are the charlatans who control our money supply, our economy, and who create the incentives/disincentives that drive our collective behavior.

They are, quite frankly, nuts. Most economics is voodoo, hogwash, alchemy, black magic. Most of economics is not a science. Occasionally, economics touches on statistics to give it a thin veneer of scientific plausibility but it is not science.

As WT notes, the US government is the world's largest deadbeat. Do you really believe the US government will voluntarily adopt policies that punish debtors? Or does it make sense that they would rescue debtors and punish creditors? What has the US done for decades since WWII? It's punished the creditors, in varying degrees. It's not going to stop unless it is forced to stop. And if it is forced to stop, the US ceases to exist as we know it.

Now figure out the rest from there.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

We hear the economic arguments so often that it is easy to think that they are true - and any alternative is necessarily false. It is frustrating to deal with.

Regarding how debtors will be treated, I lean toward thinking they will get off easy, and lenders will come out with next to nothing. Even if there was a desire to collect all the debt, I don't know how it would be possible to collect for all the credit card debt, the college loans, and the SUV loans, since the things would no longer have much value, and the people having the loans would likely not be employed. With respect to mortgage debt, it is hard to imagine a nation filled with empty houses and hoards of homeless people. Already the newspapers are filled with stories about how people were mislead when they took out loans for mortgages.

I wonder how renters will fare if they no longer have money for rent. Would they be better off purchasing something, and defaulting?

I don't agree about homeowners. A few will take a poison loan that basically makes them a sharecropper but most will walk.

Most of these properties will be converted to rentals and the only issue is how this happens. These new homeowners will go back to renting probably smaller places than before. The banks will not go down without a fight if it means tightening credit till few can buy so be it.

Banks win over home debtors any day of the week. Whats important is that these assets have preforming loans not the amount thats loaned or which bank/person owns the asset and the loan. Plenty of wolves in the banking world too.

A Hooverville. Lots of new housing developments from the 20s were abandoned in the Great Depression. "Filled" with empty houses is probably too strong a term, but don't be surprised to hear about lots of empty houses in the next few years. From the Detroit area, I can assure you that housing can be abandoned in large quantities. It is not pretty.

However, it certainly does reduce transportation and fossil fuel demand.

I tend to think of stagflation as the best possible outcome for the Fed in certain situations, as well as a reasonable outcome from the perspective of TPTB. If it doesn't get carried away, it solves lots of overhang "problems" in the economy: debts are reduced, incomes are adjusted, pension "burdens" are reduced, stock is revalued, etc. Sucks for those of us on the receiving end, but as long as things don't get carried away it isn't bad for the wealthy. They have ample opportunity to shelter their wealth.

One could argue that Reagan saw where things were headed with energy and decided, among other things, that it was time to make darn sure that the well-off were properly positioned for the day when world oil production peaked. The wealthy have certainly solidified their position at an opportune time.

Economics is the theology of the industrial age.

Jeff, you state that

The U.S. Federal Debt is currently about $8.5 trillion dollars...

According to our fair Treasury department

Federal Debt

The latest numbers (in millions):
# Debt Held by the Public is $5,053,940
# Intragovernmental Holdings is $3,781,725 (which technically isn't actually debt)
# For a Total of $8,835,665

"Intragovenmental holdings" is social security money that was spent. But that figure isn't actually debt, it's just an accounting of money that the government has spent. The following quote should clear this up:

"There are two sides to the National Debt. Public Debt and Intragovernmental Holdings. The Bureau of Public Debt defines the Intragovernmental Holdings as money borrowed from trust funds, revolving funds and special funds."

Come on, now. You are almost there, wstephens! WHAT constitutes the intragovernmental holdings? Paper! Paper promises to pay - aka debt by any other name. And whose name is on the IOU? Why, YOURS!

It's debt no matter what fiscal sleight of hand you try. And it is actually understated by a vast amount. Plus there is state, local, corporate, and private debt on top of it. Call it, oh... $40 trillion or so? By the US alone. In a global economy of $60 trillion or so?

Gee, doesn't this look fun? And we've not even talked about the $700 trillion pound gorilla called derivatives yet, have we?

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

promises to pay

Let me clarify. "Intragovernmental holdings" are not conventional debt -- the government can "pay" for them by simply changing numbers in a spreadsheet somewhere. Whereas debt held by "the public" must be paid with money -- this is a very important difference which most people ignore.

And the bulk of that money is borrowed from the social security trust, easily the largest of all the intragovernmental holdings. And those holdings must be eventually turned into cash for disbursement to citizens. So in that sense they are still real debt.

Yeah, it is an accounting line in a spreadsheet somewhere but it still has real impacts at the end of the chain.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

I agree with GreyZone, but let me state it a different way. Most of that "Intragovernmental holdings" is Social Security trust funds that the government has spent. It isn't "debt", like the other debt, but think about what the trust fund is supposed to be. The government took Social Security taxes from people for a generation with the promise that the money would be "saved" in a "trust fund" to pay for the Baby Boomers' retirement. In reality, the government collected the taxes, spent them, and wrote itself IOUs.

The Baby Boomers are about to retire, and we only have about 12 years (2019) until Social Security will need to start drawing from the trust fund. (See Figure 1-1 "Projected Social Security Outlays and Revenues Under Current Law, 1985 to 2103" at the CBO's The Outlook for Social Security.) At that point, the government will have to start paying back those IOUs to the Baby Boomer retirees who put their money into the trust fund. The Baby Boomers will expect to be repaid with money - the same kind of money that bond holders expect to receive.

It actually starts being a problem in 2007(!), when the Baby Boomers start retiring and the current Social Security surpluses begin shrinking. In 2004, according to the report, there was a $62 billion surplus. Over the course of the next 12 years, that $62 billion surplus shrinks to zero, then becomes a deficit, as we have to start paying out to the Baby Boom retirees in cold, hard cash, just like bond holders.

[Edits: corrected $68 billion surplus to $62 billion in 2004; problem starts in 2007 according to CBO report, not in a few more years from now.]

Thank you for the comprehensive explanation.

Let's try this line of reasoning then -- since the return on investment in this country is greater than the cost of borrowing, we could just borrow the money to pay the social security benefits and the money would end up growing our assets and income faster than the obligations on the newly created debt.

Very true. We certainly could, couldn't we?

But we haven't. And I believe that we won't, at least until it is too late to matter.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

until just a few short months ago the treasury dept website "debttothepenny" reported total debt (that would be the $ 8.8 trillion figure - let me write it out
$8800000000000 or $8.8 e12 rounded to the nearest $ 100 billion of course )
just wonder who the "geneous" was who decided it would be a good idea to call the social security trust fund "intergovernmental holdings")
technically isn't debt !!!!!!! lmao rolflama roflmelao !!!!! right who is the "technician" here ??? KKKarl rove ???

Semantics sure, but why count SS as "debt" and not also count medicare as debt (similar obligation), prescrition drugs (ditto), medicaid (ditto), welfare, food stamps, and any other government promise to provide anything? Promises can and will be broken or modified -- a T-note cannot be suddenly declared non-existent.

People like to count the SS "holdings" simply because it makes their doom story sound better. If the story were divided into "actual" and "promises" then the public knows to distrust the second part already. Ask people if they think the government won't someday "take away" part of their SS benefits when necessary.

debt is an obligation to pay. the social security taxes collected and spent by congress (with the accompli of every president since johnson) do indeed create an obligation to repay. either that or the congress and their accompli are guilty of fraud.

and imo anyone who tries to claim that the social security funds collected and spent are not debt is guilty of fraud as well.

technically not debt - by what technique ? lying out their asses ?

* and btw the irs has some screwy ideas about what constitutes a loan as well.

Sorry for being snarky but it seems there is a group of people that think that peak oil will be an opportunity for a new "Age of Aquarius" - we can all go back to the land and grow herbs, and plow with a horse and have a subsistence economy. And barter our skills.
Reduce Reuse Recycle and live in small communities.

This may happen, but there will be a "small" period of transition and adjustment. And I don't mean that in a nice way. I think it will take 20 years, and it will be very ugly.

Demand destruction won't matter, becuase supply will be constantly shrinking.

I guess I am a Doomer! :-)

"I guess I am a Doomer! :-)"

and quite possibly an Aquarian as well

So...what sould we do then during the 20 bad years?
Might'n we have some fun at it since there is no one watching or 'in control'? Might we work it out with barter after all? Mightn that be as good a system as the schtick we have now?

What is your solution oh wise and snarky Polytropos?

So...what sould we do then during the 20 bad years?

Lose our cheap plastic toys while we build replacement infrastructure based on nukes/wind/solar/synfuels etcetera. Then we get our cheap plastic toys again.

It seems certain the government's tax revenue will be under pressure. On the one hand there will be the Social Security and health needs of the baby boomers. On the other hand those still in the workforce will seek tax cuts to help pay for higher household energy bills and the cost of the daily commute. Something's gotta give, for starters the financial burden of foreign wars and subsidies. When that is not enough maybe then social structures will change; for example increased community self sufficiency and aged care. Perhaps stagflation is a sign the structure is unsustainable.

Professor James D. Hamilton is an expert on oil prices and writes over on the Econbrowser blog. Recently he posted about a new academic study of the impact of high oil prices. Are they inflationary or deflationary?:

The answer is, it depends:

Kilian then goes on to show that while oil price increases that result from supply disruptions or speculation tend to depress U.S. GDP, oil price increases that result from global demand factors are actually associated with stronger U.S. real GDP growth in the first year of the shock, though they later can be followed by slower GDP growth. Kilian also finds that demand-led oil price increases appear to be associated with an increase in U.S. inflation rates.

The question is whether the high prices are due to strong demand growth versus supply disruption. The former tends to be inflationary and the latter tends to be deflationary. Now in the case of peak oil we usually consider this as purely a supply constraint; but really when we look at the global situation the large demand growth from China and some of the other third world countries is playing a part as well.

To the extent that we hit Peak Oil as a "bumpy plateau" where the problem is excess demand more than falling supply, the situation would tend to be inflationary. But if we hit a serious Peak Oil contraction in supply, that will suppress the world economy and tend to cause worldwide deflation.

An interesting paper, but he is asking the wrong question. The most important question is this:

What is the impact of a forced decline in the oil supply on economic activity?

Which is the dog and which is the tail? In the 20th century, perhaps one can argue that the economy (and politics) was the "dog" in determining oil production and prices. In the post-peak 21st century, the roles get reversed. Analyses based on historical behavior are thus of rather questionable value.

There are quite a few working papers at the NBER on stagflation, inflation, and oil. Notice that for the last search, most of the initial hits are for Prof. Martin Feldstein of Harvard, who is a proponent of tradable "Oil Conservation Vouchers" to help wean us off our addiction to oil.

[Edit: I should mention that Lutz Kilian was a co-author on the earlier "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative" and "A Monetary Explanation of the Great Stagflation of the 1970s" papers.]

Most of the studies of the stagflation of the 70s that I've read at NBER conclude that stagflation could just as easily have been explained by monetary policy as by oil price shocks. I hope no one is surprised that economists largely think inflation is a monetary phenomenon...

As a member of Portland's Peak Oil Task Force, we struggled with this issue. All the elements of our report consistently came back to economics and money.

Money = Energy

Without energy, there is no money, just reality. The best book on how to get out of this mess is "Alcohol Can Be A Gas" by David Blume.

I have read Simmons, Heinberg, - the whole lot of them and Blume by far offers concrete examples of ways to get out of this mess. We need to implement a crash course for infrastructure right now or all the magical thinking in the world won't stop us from our own implosion.

All in all, the Nintendo generation had better start learning to farm on their front lawns right now. You can't eat your latest techno gadget.

Prior to heading out to Portland for a visit, I thought about contacting you guys, to see if you would be interested in a Peak Oil talk by a Texas oil patch guy, but it seemed kind of pointless--you guys are already so far ahead of the rest of the country that all I could say is "Good job."

Great post on Milton Friedman further up. He is always free market supply and demand - and he is right.

Howevever, the sequence he laid out will take 20 years.

There is another great phrase by Schumpeter on capitalism - He called it "creative destruction" How pleasant.
This is what they call it when your company goes bankrupt, you are laid off, and your house is forclosed.

Thats what we will go through after peak oil: Creative Destruction. Out with the old and in with the new. It's great if you are on the new side.

I have a feeling that "Creative Destruction" is going to be about as refreshingly creative as "Compassionate Conservatism" turned out to be compassionate.

This has been interesting posts.

I have shelter, no debts, have done preps for PO. Had savings left after that. I bought gold and silver for all the savings.

Fiat money will certainly not be better, and it is little difficult to own oil. So i will go with the PM:s.

I think that the Fed and US Government is not in a political position to Hyperinflate without immediately losing power. Hence modest inflation is the game with additional currency added for this plus for the GNP growth. That has happened for multiple generations since the FED has been in business.

Then Peak Oil hits hard, and the economy MUST go into negative GNP mode which cannot be overcome - no matter what- with more money in the market. It all gets immeadiately swallowed in severe DEFLATION that then begins to get stronger and spiral down at some point. The US GNP will likely go down each year at a similar rate to oil decline - then it will compound along the way. Our Dow Industrial should go down 90% and then go down 90% a second time, then 90% a third time until we are 400 instead of 10700. There is absolutely nothing that can be done. There will be a economic collapse. There will eventually be some sort of a much lower level as we now anticipate a deflating future year after year.

I've read this thread from top to bottom twice and it seems the contributors err on the Inflation side with some Hypers and a good chunk of Deflators.

In the middle are the mixed-baggers with a bit of this followed by a bit of that. There's also some 'crashnauts' and 'muddlethrewers'.

We seem to mostly concentrate on the 'when' here at TOD but it's good to see we have made some inroads into 'how'... :o)

"I keep six honest serving-men (They taught me all I knew); Their names are What and Why and When And How and Where and Who."-Rudyard Kipling


Whether inflation or deflation, the conventional wisdom here seems to be that it's time to start hoarding valuables. Crude oil futures seem good, until we realize the fragility of the economic chain that has assigned value to the pieces of paper that we call investments.
I don't feel like storing a pool full of diesel, but I see that Harbor Freight has their 45W PV/regulator setup on sale for $199. Seems like if these are kept cool and dry, they might last indefinitely. They sure won't go down in value!

First of all; thank you Jeff for an informative post feeding an interesting and educational debate.

One observation I made reading through the many interesting posts on this thread is that Peak Oil is a singularity that none economies have had any previous experiences with and nothing will happen in a vacuum.

We may make similarities and try to extrapolate and scale from similar crisis like in the 80’s where it seems as the increase in oil prices fed the inflation and the increase in interest rates, which came down some time after oil supplies increased bringing the oil prices down.

This time there is little hope that oil supplies will increase.

Peak Oil also creates opportunities as well as new challenges, and I have been wondering that we try to create/suggest solutions based upon our education and experiences, which was a success on the way up, but are they as well applicable on the down slope?

I note that some of the thinking is based on the idea of energy substitution, that is nuclear and others will substitute for oil.

Peak Oil will first of all affect mobility, and should gradually affect production of airplanes and cars etc., which demand and production should be expected to decrease. These items of mobility are produced with energy mainly from other sources, which suggests that demand and consumption from these other energy sources also should gradually decrease and could possibly introduce a downward pressure on prices of energy from some of the other sources. We could in other words be faced with some paradoxes (and most certainly will) on the down slope, and we should try to understand some of these relations.

One observation I made was that after the break down of the Former Soviet Union in the early 90’s, oil consumption within Russia fell, but so did also nat gas and electricity consumption. These consumptions increased as economic activities again increased.

As noted by someone else on this thread, people would use a larger portion of their income on energy and other vital energy based products (like food) and would have less to use on “other stuff”, which by itself suggests lowered energy usage for producing “other stuff”.

And as we move further down the slope there will more or less be established new equilibriums.

Though I think that Peak Oil at first will be experienced as inflationary, I tend to think it in the long term will turn out to be deflationary on the down slope.

At first, the money supply would be constant, while goods and services dwindle; result: inflation. Later, existing infrastructure will represent a very large part of the wealth, so one would expect deflation, since money represents existing goods and rendered services. However, I don't think it likely that money will be kept in circulation without major changes during the next generations.

A more basic question to ask first might be "what happens to money". If the money supply is predicated on growth, then there will have to be less money. Who will the bank lend to in order to create money if the economy cannot grow?

That would be a structural crisis bigger than inflation or deflation.

Many of the relocalization plans include local currencies that are specifically not convertible and that are not based on loans.

cfm in Gray, ME

Hi Jeff,

I appreciate your thinking and your background.

re: "Allow me one courtesy: for the purposes of this discussion, assume that we are not able to sufficiently mitigate the effects of Peak Oil through conservation, efficiency, or alternative energy sources."

Could you possibly (at some point) elaborate on this?

Do you see these three avenues of mitigation as being the only ones possible?

Do you see some (any?) mitigation as possible? If so, could you possibly share what that might be? So...your assumption here is that mitigation, while possible to some degree, is not sufficient?

Perhaps for a future article, but I'd very much like to know what you consider positive action paths to be, either in general, in specific, or both...

Things that might be done now, and if not doable, why (or why not).

re: "I think this debate is incredibly important and interesting, both from a financial mitigation perspective as well as for personal preparations."

I agree - discussing scenarios is instructive. What I'm wondering is...might there be a "financial mitigation perspective" that starts a few steps prior?

Are there outcomes you see as desirable, and if so, do you have any thoughts as to how to bring about those outcomes?

I know you asked Jeff, but let me toss some thoughts out there.

re: "Allow me one courtesy: for the purposes of this discussion, assume that we are not able to sufficiently mitigate the effects of Peak Oil through conservation, efficiency, or alternative energy sources."

Could you possibly (at some point) elaborate on this?

Do you see these three avenues of mitigation as being the only ones possible?

Let me answer the second question first. What other avenues do you believe are possible? I can only see two - do with less or find replacements. Jeff's first two suggestions, conservation and efficiency, have to do with living with less energy. His third is finding replacements. There are no other options.

As for the first question, that is probably too large and too inflammatory a topic to discuss here at TOD. Let me simply say that if you make the assumption that Jeff has made, there will be far more problems than just finance with which to deal.

Then you ask:

Do you see some (any?) mitigation as possible? If so, could you possibly share what that might be? So...your assumption here is that mitigation, while possible to some degree, is not sufficient?

Perhaps for a future article, but I'd very much like to know what you consider positive action paths to be, either in general, in specific, or both...

Things that might be done now, and if not doable, why (or why not).

He already answered your first question in his initial assumption when he said "not able to sufficiently mitigate the effects of Peak Oil". That was the assumption going into his scenario - that any mitigation done was insufficient.

Then you ask for positive action steps. I won't presume to speak for Jeff, but if I had to guess, I don't think you'd like his answer.

I agree - discussing scenarios is instructive. What I'm wondering is...might there be a "financial mitigation perspective" that starts a few steps prior?

Are there outcomes you see as desirable, and if so, do you have any thoughts as to how to bring about those outcomes?

Are you asking about desirable outcomes generally or in light of the assumptions in this specific scenario? I ask because those would appear to be two radically different things. The most desirable outcome is that we do succeed at mitigating the effects of peak oil and of course that is not part of Jeff's scenario in this article.

If you ask for desirable effects in light of the article's assumptions, then mine are simply to survive the dieoff, an unlikely proposition in any case.

Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett

Once you consider the entire financial situation, peak oil, global warming, water, food problems etc etc. Unless the world dramatically changes how it works at many levels I cannot see effective mitigation of any of our problems.

With heroic efforts and sacrifice sure we could solve our problems but its not going to happen. Instead we are fighting over the right to cut down the last tree knowing full well that once its gone we are gone.

I'd love to see someone who thinks otherwise right even a halfway sensible rebuttal addressing all the issues that results in us somehow coming out of this in reasonably good shape keeping our current institutions.
I don't see it.

Only thought I might throw out is that the last time the notion of a 'limited world' permeated the public conscious (somewhere around Carter's time), world oil consumption dropped precipitously. Conservation actually happened.
Whether that 'conventional' response is enough for what faces us now or if you believe we tapped out the 'low hanging fruit' is a different question.

I'm not sure what you mean by "reasonably good shape", but our current institutions will survive in some form.

"Heroic efforts and sacrifice" will certainly be necessary. Adversity brings out the best in a free society. Throughout history the human race has shown a remarkable ability to adapt to new situations. Petroleum sat unused a mere 200 years ago.

Consider the vast waste of resources. It's easy to see that we could get by using a great deal less. Food will become much more dear as it becomes more labor intensive. We won't dare use it for fuel.

Global warming is the wild card on your list. As oil consumption declines maybe the carbon dioxide concentration will stop increasing. Or maybe Greenland will melt and the coastlines will be redefined.

Chaos is not an option. Some places may become lawless for a time. But the organized countries will advance into the future as Arabia did during the Dark Ages or as Europe did during the industrial revolution.

Petroleum makes things easy, but it's not a long term solution. In the future life won't be so easy but it will still go on. Yes the world will "change dramatically on many levels"; it always has.

Money is several things---
1. A medium of exchange-- This has been going on for a long time, wether it be sea shells or dollars, with a mutually agree exchange value.

2. As a commodity-- Posses it, make jewelry out of it, do anything you want.

3. A a repository of wealth (at this point, a virtual depository of wealth)---

Now the first 2 are not a problem. Number 3 is, and can be linked to the problem we are in with monetarism today. Virtual wealth, and the manipulation
by greedheads doing it has caused much pain and artificial wealth.

It seems to me that there will be different policies for the US (Nafta), The EU and Japan.

It could very well be that a lot of money will flow into the EU.

That means the Euro will go up and the ECB will reduce the interest rate.

As less energy is available to conduct trade, local influcences will prevail over mundial trends. Policy will change accordingly, and very different systems will develop over time.

Funny coincidence - I was just looking through the archives and discovered this article precisely one year ago today, on April 12, 2006:

Peak Oil: The inflationary case

Posted by Stuart Staniford on April 12, 2006 - 12:51am

I'm very interested in the whole "inflation versus deflation" peak-oil argument. I started thinking it was clear that peak oil would be inflationary, but I'm getting less sure. I don't understand the deflationist case in enough quantitative detail yet to really assess it, but I'm working on it...

Here is a must read on this topic.

Saving the system

From a technical standpoint, the Achilles’ heel of the fiat money...Banks have to want to lend, and people have to want to borrow, before the reserves can work their way through the system and become money.

Best, Dan.

Crickey folks...late night check on currencies and commodities over at Bloomberg shows:

Goldman Sachs 475.72 6.66 (eeekkkk 666!!)

USD vs. EUR = 1.3518 (this is moving fast)

GASOLINE RBOB FUT (cents/gallon) 220.100
GOLD 100 OZ FUTR ($/troy oz.) 682.400
WTI CRUDE FUTURE ($/barrel) 64.040
BRENT CRUDE FUTR ($/barrel) 68.910

Could we see Brent break $70 soon?

Didn't see this posted anywhere.

Seems the head of the world bank has been doing the hanky panky, and got caught. Yes bankers, trust them with your money and your future. Considering I spent 15 years working for one, am I surprised.

Quid Clarius Astris
Ubi Bene ibi patria

Hey can i get a "Certificate of Economics" for reading 202 posts of economics here on TOD? Although interesting, I can't help but think I should get something for reading them all. By the way, great posts from all involved.
I still think stagflation is the soup de jour!

We live in interesting times. I think it will be a slow boil as (we collectively, and not me or any of you, cuz we can see it, thanks to the TOD) society is not sure what the problem is, thinking the prices will come back down in the near future! By then we are cooked!

society is not sure what the problem is, thinking the prices will come back down in the near future! By then we are cooked!

You nailed it.

That's why I've officially given up on thinking about how to save society. I'm still very interested in saving a knowledge based society. I happen to like some aspects of our technical civilization and think they can make a renewable based life comfortable and rewarding. Not everything we have done in the last 200 years is bad.

Hi memmel,

Thanks and
re: "I've officially given up on thinking about how to save society."

My vote is for a "TOD vacation" kind of "given up" (like famous posters who leave and then return) - a vacation...a retrenchment...because it's difficult work, but "someone has to do it".

Could you narrow it down a bit? Perhaps address one aspect? And see...what is tied to this aspect?

re: "I happen to like some aspects of our technical civilization and *think they can make a renewable based life* comfortable and rewarding."

I hope this is a potentially fruitful contradiction to the first statement.

Some items on my list:

- Co-ops - all kinds (
- Salari ideas - do they translate to anything practical?
renewable energy first priority for water supply transport and purification.
- The overarching problems, consumption overwhelming efficiency, population overwhelming everything...and how they might be tied to specifics. Pop. (legal rights of women), war and the prevention of war.
- Mediation, conflict resolution, etc. (despite the reference to guns, etc. I would say, if one hasn't actually experienced it, one does not know.),

re: "Not everything we have done in the last 200 years is bad."

So many people are doing things they at least perceive as good, now. We've learned so much - in fact, did someone describe the KSA production discussion as "magical"?

jeff, an excellent and understandable explaination of inflation. i totally agree with your conclusions.

you refer to entitlements and social security immediately springs forth. well these entitlements are at the pleasure of congress. of course we know how long an elected representative would last if he or she told the old codgers that they could no longer have their social security and medicare.
and for that reason imo , the real 700 lb gorilla, military spending is just as much an entitlement as social security, ie we know how long an elected representive would last if they were to tell the testosterone overdosed american public that they wanted to cut military spending.

The generation that lived through the 1930s depression and WWII is dying off, and with it much valuable insight and wisdom about how to survive difficult circumstances. I've been encouraging (well, requiring ;->) my students since last fall to engage people of that generation (80+) to learn about how they coped with such difficulties. FYI, I plan to collect these on my website and will have them posted by July (will post that then). There are a lot of interesting nuggets. But of course oil was dirt cheap in the 1930s...

Hey LoveOregon,

I have been doing the same with the older generation. I work with Video, and am trying to record conversations and "How To" segments with them (advice, canning, etc.) - but they all seem quite camera shy.

I would think an "Hit" TV show would be feisty old people who still have their mental faculties about them willing to participate in helping save the present/future generation that will soon wake up and be crying like little babies.

They will need to hear how to make it from true people, not corrupt oil drenched politicians.

Hi Peak,

re: " shy..."

Just a suggestion: have you thought of audio instead? Radio can be wonderful. A lot of people actually do listen to it. Less intimidating. Many people who don't do computers listen to it. Many truck drivers listen to it. Many, many people...
There has to be some room for new programming.

My personal bias (simplified form)is: nothing anyone sees on TV sticks. Radio, on the other hand...

I've long believed- since before hearing of the Peak Oil concept- that energy resource depletion was inherently inflationary. Viewing the world economy as an ecosystem, a good case can be made that real costs and hence real value can be measured in energy terms. Thus any reduction in the supply of energy with money supply constant is inflationary, as is a general rise in the price of energy. Prior to the 1970's, when the US economy was relatively self-contained, there was a close correlation between the CPI and the domestic cost of energy. The same pressures that cause this inflation can also bring about deflationary events, such as stock market crashes, but it seems to me the underlying trend has to be steady inflation. So I'm long gold, energy-related stocks and farmland.

I'm curious as to what people here think one should do with their money if we assume an inflationary response to peak oil.
For liquid assets it appears best to spend them now on tangible goods, being that our money has more purchasing power now than it will in the future. For example, I live on 36 acres with several other people and we hope to invest a good portion of our liquid assets into things like a wood cookstove, a small chicken-heated greenhouse, new high-efficiency windows, equipment for our draft horse, etc.
For non-liquid assets such as retirement accounts, where the money cannot be withdrawn without a significant penalty, it is not so easy to know where to invest. Presently I'm heavily invested in several energy stocks, funds, and trusts, a silver etf (SLV), and a mutual fund that invests in gold mining companies. I'm planning on putting some money into some options on distant oil futures, and have a small amount invested in an oil etf to hedge our gas bill. I'm aware that there are inflation protected funds out there, but really don't know much about them.
That being said, I'm still unsure as to how best protect our assets against inflation. Say for instance you want to have several thousand dollars available to pay your mortgage if you lose your income: where should this money be kept?
I'm interested to hear what others are doing financially in regard to this issue.