Have We Reached an Inflection Point in Economics History?: “Indeflation” and Energy

[Ed's note by PG: This is a guest post by Chris Nelder, an energy analyst and journalist; his work can be found at GetRealList and Energy & Capital. Chris is the principal author of Profit from the Peak – The End of Oil and the Greatest Investment Event of the Century, and the co-author of Investing in Renewable Energy: Making Money on Green Chip Stocks.]

A fierce debate now rages among economists, investors, pundits and the puppetmasters of fiscal policy: What’s next, inflation or deflation?

Has the most massive money-printing spree in history successfully stimulated the global economy and put it back on an upward course with rising inflation? Or are we still in a global downturn, temporarily masked by the stimulus, with prices, wages and employment still falling?

A comforting 30% gain in the major stock market indexes since the March lows has given renewed confidence to the “green shoots” trumpeters who dominate the airwaves and the press.

But grayer and wiser heads in the investing community—like Dave Rosenberg, John Mauldin, Nouriel Roubini, Gary Shilling, Peter Schiff, and Dave Cohen—have a more bearish view. The financial sector must now deleverage, they argue, which means liquidating assets, repaying debt, saving instead of borrowing, and contracting in general. In their view, the process will take years, not months, and what we have seen since March is a classic bear market rally.

Consider the data Rosenberg offered in a commentary last week in support of his deflationary thesis:

  • Residential real estate still sports a 12-month supply of unsold inventory, and housing starts have staged a very weak recovery this spring.
  • Every major industry posted a decline in May. Industrial production had its seventh decline in a row in May, to a level last seen 11 years ago. The Institute of Supply Management (ISM) index, a measure of manufacturing activity and a proxy for tech spending, is still falling.
  • Employment slid in May to greater depths than were seen in the last two recessions, and “real organic personal income” fell for the second time in the last three months. Ultimately, recessions don’t end without rising employment, meaning consumers with money to spend.
  • Prices are generally still falling. The Producer Price Index (PPI), used to evaluate wholesale price levels, is down 37% year-over-year “to a 50-year deflation low of -5.0.”

There are other signs that this spring’s green shoots may be browning. The Consumer Price Index (CPI), the Labor Department’s key measure of inflation, has fallen 1.3% over the past year, the largest decline in nearly 60 years, mainly due to the 27.3% crash of the energy index component.

Meanwhile, the consumer remains beaten and bruised. As my colleague Steve Christ pointed out last week, U.S. household net worth fell by $1.3 trillion in the first quarter, and household wealth is down 21.6% from its 2007 peak. Commercial real estate is contracting painfully, with prices plunging and vacancies and defaults soaring. Meanwhile, consumer credit defaults are still rising, even as rising interest rates have snuffed out the resurgence in home-buying.

Liquidity in the credit markets remains a problem as well. Banks simply aren’t lending out the Fed’s forced injection of fantasy capital. Indeed, they are entirely intent on paying it back as quickly as the Fed will let them, on the heels of secondary stock offerings and other measures they have taken to raise capital and reduce their exposure. (For a personal anecdote, I called Discover two weeks to take advantage of a recent 1.8% promotional offer on balance transfers they had sent me, and was told that they aren’t accepting any more balance transfers right now, from anybody, period.)

On the whole, I think the case for deflation and contraction is well made.

Commodity Inflation

At the same time, food and energy prices have been rising rapidly. Oil has rocketed from the low $40s to the low $70s in just four months, a roughly 71% gain. Soybeans rose about 50% over the same period, with most other grains gaining similarly. Normally, this would suggest inflationary fears, and indeed it has apparently drawn hedge fund money off the sidelines, out of bonds, and back into energy and commodities. (Energy analyst Dave Cohen did a great study of speculation in the current commodity cycle last week in “Bad Signs, New Bubbles.”)

I don’t want to make too much of the commodity resurgence, however. The market continues to price oil inversely to the dollar, and the dollar’s fall has been echoed almost perfectly by oil prices:

6-19-09 Nelder EAC - 1

The dollar’s decline can be viewed as the proper result of printing trillions of dollars out of thin air, without new assets to back it—the inflationary thesis.


On the whole this year is looking a great deal like last year across the energy and commodities sector, with the same sort of inflation. But there is an important difference this year: The economy and the consumer are sick, very sick. Gasoline at $3 was a nuisance last year, but this year it really hurts.

Perhaps we should be zooming out on this picture, and considering the affordability of oil. Consider this 60-year chart from the blog of “Mr. Excessive,” which tells quite a different story:

6-19-09 EAC Nelder Chart 2

The affordability of oil, as measured by the S&P500, peaked in 1999, and has been in decline ever since. Oil prices began rising sharply at that time, as the early effects of peak oil began to be seen. Global conventional oil production has been flat since 2005, despite a tripling of prices.

So is it inflation or deflation?

My pal Gregor Macdonald argued this question elegantly on his blog in April, and in a recent conversation asserted, I think rightly, that it’s not an either-or question. In fact, we’re seeing inflation (of prices) and deflation (of assets) simultaneously. Investor guru Doug Fabian has termed this “indeflation” and Izabella Kaminska of FT Alphaville has called it “compartflation.”

Instead of just looking at the dollar and inflation, we should consider that, as former International Petroleum Exchange head Chris Cook argued on The Oil Drum, energy is the only real currency. Our fiat money is but a distorted representation of it, and that energy is declining in real terms as oil, natural gas, and coal all become progressively harder to extract and of lower energy content.

Are We At An Inflection Point?

We now appear to be bumping our heads against an invisible ceiling, where the decline in real energy meets our pain tolerance for high prices. When gasoline hit $4 last year, it created real demand destruction because people simply couldn’t afford it with their evaporating dollars. Likewise, the spike in natural gas and coal prices ultimately translated into such high prices for basic building materials like cement and steel that demand was curtailed.

It now seems possible that we have reached an inflection point in economic history, where the price at which energy is high enough to sustain new production is the same price at which things become too expensive, leaving us no option but to downsize.

Academics including Charles Hall, Cutler Cleveland, and Howard Odum have explored the relationship between primary energy and economic growth exhaustively. Hall and his graduate student David Murphy graphically depict where we are now as follows:

Hall-Murphy Oil and the Economy

Until we understand this key point, we are going to continue to go through wrenching cycles like we experienced over the last year. Spiking energy and commodity prices lead to destruction of the economy, which then gathers itself at a lower overall level until prices spike again, and back around the wheel we go. As energy declines, the ceiling will get lower and lower, and it will take more and more money to buy the same things.

No amount of tinkering with monetary policy can change that. Unlike money, Btus can’t be printed out of thin air.

Unfortunately, neither the Fed nor Congress seems to have learned this lesson.

The Fed still thinks that tweaking interest rates, buying bonds, forcing banks to keep the fantasy money, hiding the stress test results and the like can somehow ease us into a manageable recovery.

A few bright bulbs in Congress suggested last week that we exchange 70 million barrels of light sweet crude oil from the Strategic Petroleum Reserve (SPR) for an equivalent amount of lesser quality heavy sour crude, in an effort to dampen oil prices. Aside from being a fundamentally bad idea, I continue to believe such a move would be utterly ineffectual. The maximum official rate at which the SPR can be drawn down is four million barrels per day, but I suspect the actual rate would be far lower. In any case, the price difference between the two grades of oil is fairly small, and the value of the swap would virtually disappear within a flow of 84 million barrels a day of globally priced oil.

The other bit of new legislation, a “Cash for Clunkers” bill that passed last week, also appears to be completely toothless. I supported the idea until I learned the anemic requirements of this bill, which would offer $3,500 vouchers for a mere 2 mpg gain in fuel economy for light trucks and SUVs, and $4,500 for a 5 mpg improvement. Cars would only need to gain 4 to 10 mpg to qualify.

Suffice to say that I still have very low expectations that our national leadership will offer any tangible, effective methods to significantly reduce our consumption of petroleum. I certainly do not see them coming to grips with the near-certainty that by 2012, the world’s oil supply will go into terminal and relentless decline.

Looking internationally, finance ministers for the Group of Eight (G8) expressed concern over the influx of capital into the commodity sector after their meeting last weekend. In a communiqué, the group stated, “Excess volatility of commodity prices poses risks to growth. We will consider ways to improve the functioning and transparency of global commodity markets, including considering IOSCO [the International Organisation of Securities Commissions] work on commodity derivative markets.” Ministers have asked the International Monetary Fund (IMF) and the International Energy Agency (IEA) to suggest new ways to monitor and regulate the oil markets, in an effort to limit speculation and dampen future volatility.

If done very carefully, such an effort could moderate the boom-bust cycles ahead, and give the world a crucial measure of slack in which we can sustain the long term investment horizon needed to transition to a renewable energy infrastructure. If done hastily or badly, it could starve the energy markets of capital, or cause unintended and probably worse effects.

I think that as it is now constituted, the market is inadequately equipped to face this inflection point of indeflation, and history is no longer a useful guide. We’re entering uncharted territory while the risk of peak oil is still priced at approximately zero.

So what does all this mean for investors?

First, it means long-term investing in a diversified portfolio of stocks is probably not going to be a good strategy for a long time to come (if ever); it’s time to play defense and look for low-risk yield. Second, it means that investing in oil and commodities will continue to be the name of the game for many years, but investors must watch the signs I have identified here carefully to know when it’s time to dive in and time to jump out as we churn through these cycles under a dropping ceiling. And third, it means that we all need to learn to live at a lower level, eliminate debt, build savings, and buckle up for a long and bumpy ride.

Thank you for posting this. This is bang-on the Big Question. Many of my colleagues express surprise that the cost of oil has not decreased, taking peak oil as non consideration. With any economic upturn it seems clear that oil costs will rocket up again, the system has changed.

Your third point is critical, most TIAA-CREF holders I know have shifted to 70% bonds / 30% stock regardless of their age. The market and perspective has changed. My guess is that we are in a long U with perhaps 10 years running along the bottom of the U.

Unfortunately, the combination of peakonamics (water, energy, environment, climate, population, wonderfully covered in an earlier post) and the isolationist political faction here in the US will make this a very bumpy ride.

First, it means long-term investing in a diversified portfolio of stocks is probably not going to be a good strategy for a long time to come (if ever); it’s time to play defense and look for low-risk yield.

Most TIAA-CREF holders I know have shifted to 70% bonds / 30% stock regardless of their age.

My institution offers retirement plans through both TIAA-CREF and Fidelity. For the very reasons that Chris alludes to, I wanted to switch from CREF's "diversified portfolio of stocks," where I've dumped my money for years, into a couple of Fidelity energy funds before my retirement assets got shredded even further. But guess what? Those funds aren't available under the basic retirement plan....

I was on a committee at my university that evaluated our retirement plans. We bailed out of TIAA/Fidelity and got into Diversified (where we can choose our own fund lineup, and there is less of a conflict of interest since they are only a record keeper -- they have no funds of their own to push).

Most importantly, we opted for the availability of a "Brokerage Account" (or a "Mutual Fund Window")wherein employees can, as with a typical brokerage account, choose any mutual fund (and, maybe ETF too, not sure yet re that). I was a strong proponent of making this Brokerage Window available so that employees could create their own retirement mutual fund portfolio, with access to energy, precious metals, sector, and inverse funds. None of these were available to us before.

Without this, the fund lineups are based on the assumption the economy and stock market will grow, and that taking long positions is rational. With peak oil, it isn't.

I threw all of my TIAA-CREF investments into their money market just before the crash, thanks mostly to postings on this and related sites--thanks to all for that.

I would like to take it out completely and invest locally in institutions that help the community here, but the penalties and complexities have helped me put that off so far.

I don't think its safe, and increasingly I am questioning the morality of having my money, such as it is, helping to keep the wheels of a corrupt and destructive national and global economy turning.

Without this, the fund lineups are based on the assumption the economy and stock market will grow, and that taking long positions is rational. With peak oil, it isn't.

I agree. Was this among the arguments that the committee made publicly in favor of the switch from TIAA/Fidelity to Diversified, or was the whole "peak oil" thing left unmentioned?

I did not mention peak oil (although I have given lectures about it at the university).

The primary argument that got the Brokerage Account in the mix was my repeated complaints that those who wished to invest in energy, commodities, precious metals, or inverse funds could not do so with TIAA/Fidelity.

I have only 4.5 years to go to age 59.5 when I get get my money the hell out of my 403b retirement fund. Just hope money still has meaning then.

I recently contacted my University's HR department about this very issue. They wouldn't budge - the guy thought I was a lunatic for wanting to invest in gold and whatnot. He told me "we know what we're doing". Yeah, right.

Since I am so far away from retirement age (at least 15 years), this is a significant motivation for me to just quit my present university. At least then I can withdraw from my 403b (with penalties). That is probably a better option than loosing it all, which is what will happen if I wait too long.

Glad to hear someone got their university to think about this.


My wife and I have been out of those retirement accounts for years for the same reason. In the course Andre and I did together (see Post Peak Living, Uncrash Course) we spent a lot of time discussing this sort of subject as it is a highly relevant one for many people right now.

After losing more than 31% in my 401K in 2008, I decided to take a good look at how my money was to be invested. My company retirement account through Fidelity also does not offer anything other than Mutual funds and Bonds. In February, I decided to stop all pay deductions into the 410K. I lost another 5% in January. I figured it would be money better spent to put the measly 2% onto my debts than to waste it away into Funds. Even though there is company matching, I determined it was not feasible to just have the money sitting there losing value. I bought some silver (even though the price has went down some), but I still have a physical commodity with value. When the SHTF and the dollar is worthless, I can still atleast use the silver to eat a meal.

Why don't you by the meal now?
Even if you don't go the survivalist route and buy purpose made storable food, regular old canned items last a long time. Read the "best by" dates on tuna in oil or any canned food next time you are in the market.
Just the fact that food will continue rising is enough of a motivator to buy long term shelf life stuff now.
Died beans, pasta, canned pasta sauce, rice flour.....you get the point.
Might sound kooky and extreme now but it will look like a prudent move later.

I agree on your point. The reason why I decided on silver is because it is much easier to hide the months worth of food equivalent than the actual food itself. Because when THSTF there will be a large majority of every person for themselves mentality. It is much easier to hide a small box than a small room from the hordes. Because if people find out that you have food, some will want to take that food by force. Just look at every TV clip of refugee camps when the food truck arrives. Any semblance of order is short lived and then turns to chaos. It might seem dooms dayish, but I am just going with the general trend that I see. I would like to think that people are better than that. But when it comes to filling the belly, all nice and fuzzy feelings about humanity disappear.

Good article. BTW, Greenspan has weighed in on the issue:

Inflation is great future challenge: Greenspan

LONDON (Reuters) - Former Federal Reserve Chairman Alan Greenspan said on Friday that inflation poses a major threat to long-term economic recovery and its threat must be confronted.

"Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge," he wrote in London's Financial Times. "If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012.

"Earlier if markets anticipate a prolonged period of elevated money supply."

In any case, my outlook (building of course, on a lot of work by other people), in my ELP Essay in April, 2007, was for deflationary trends in the auto, housing and finance sectors and inflationary trends in food & energy prices:


Greenspan was one of the chief architects of the housing and tech bubbles, through his endless manipulation of interest rates and extreme laissez-faire "no regulation --ever" policies. I would, at the very least, give the opposing view equal time. Personally, I disregard anything that comes out of his mouth.

Didn't you read the article?

"Spiking energy and commodity prices lead to destruction of the economy"

there was no housing bubble, only peak oil. Such is the expert analysis of oil drum.

No. There were housing and credit bubbles, visible as undue price/credit rises. They were burst by the end of oil supply growth but exist they did nevertheless.

Kudos, WT, you nailed it. ELP FTW!

Seems like you are adjusting your position on inflation a bit since we last spoke. I lkie it.

"So what does all this mean for investors?"

IMO there is no longer any excess in the system for investors to tap into and draw out.

There is tons of money out there in private hands and this money can be coaxed out through various schemes, example; Goldman S[u]acks.

There will be plenty of “New Tec, Clean Tec, Green Tec” opportunities that will receive enthusiastic investment and if you are cleaver you can get in and get out with a Sack of Gold but all are essentially boondoggles guaranteed to be worth less than stated shortly after start-up.

In short there are no longer any legitimate investment opportunities, just shake down opportunities.

Even food production/farming/agraculture does not represent a return on inve$tment.

Not putting that down. Just calling a spade a spade.


How can conventional energy not be a good "investment". It seems like there is going to be a chronic supply/demand imbalance until the Magic of technology provides a viable alternative(doubtful).
As far as farming, I think that the further down Maslow's pyramid we descend the more valuable food production will become. It may not have value in terms of money but in terms of survival............

"There will be plenty of “New Tec, Clean Tec, Green Tec” opportunities that will receive enthusiastic investment and if you are cleaver you can get in and get out with a Sack of Gold but all are essentially boondoggles guaranteed to be worth less than stated shortly after start-up.

In short there are no longer any legitimate investment opportunities, just shake down opportunities."

This is pretty much my conclusion, too. It looks in retrospect as though this has pretty much been the situation for some time now.

I think putting money into paying down mortgage, some preps, some kinds of education, and some very small-scale, local endeavors that are likely to make your own area more resilient are the best "investments" at this point.

I'm not quite as bearish as you then Jeff, but I think we may be converging a bit. I think hard farming related assets--land, equipment, livestock, fertilizer, etc.--do have real value and are possibly the only assets worth investing in at this point. I'm not alone in that view either:

"I'm convinced that farmland is going to be one of the best investments of our time. Eventually, of course, food prices will get high enough that the market probably will be flooded with supply through development of new land or technology or both, and the bull market will end. But that's a long ways away yet." -- Billionaire and legendary investor Jim Rogers, "Buy Farmanlnd. The Best Investment of Our Lifetime."

I second you and Jim Rogers.

This just in: Deutsche Bank: "Projected food, energy demands seen to outpace production"

With the caloric needs of the planet expected to soar by 50 percent in the next 40 years, planning and investment in global agriculture will become critically important, according a new report released today (June 25).

I only read the summary, but from that it appears this report is typical in having a staunch "supply side" bias. What is fascinating when looking at how agricultural commodities are used is that most of the grains go to animal feed. This doesn't have to happen. The world food supply is still super abundant. The uneven distribution of purchasing power and rising meat consumption causes prices to rise and therefore lead to malnutrition and starvation. Growing more food doesn't seem to be a way to solve this fundamental dilemma.

On the misuse of grains. Steers, for example, might get up to 1000 lbs on pasture alone. They then go to feedlots and are fed grains for 6 weeks and then balloon up to 1200 lbs. Their fatty acids shift from Omega 3 to Omega 6 types, their poop and urine gets concentrated in one place and pollutes air and water, they are given loads of the same antibiotics humans use so that resistance sets in, etc. Why not just eat them at ca. 1000 lbs as they come off the grass and avoid the need to grow ABOUT HALF OF U.S. GRAIN AND SOY PRODUCTION?

The focus on the food system should be on:

1. Demand side management. To a large extent I think this could be accomplished by removing the subsidies for commodity grains and outlawing feedlot operations.
2. Developing widespread agroecological management practices that wean soils off of artificial fertilizers and pesticides. The need for this stems from both a "peak everything" resource perspective and concerns over the contribution of farming to greenhouse gas emissions.
3. Localizing and diversifying food production, processing and distribution.

Right on Jason

Professor: “There must be alternatives. You must have some technology that can solve our problem.”
Klaatu: “The problem is not technology. The problem is you. You lack the will to change.”
Professor: Then help us change…”
Klaatu: “I cannot change your nature. You treat the world as you treat eachother.”
Professor: “But every civilization reaches a crisis point eventually. [...] Only when your world was threatened with destruction that you became what you are now.”
Klaatu: “Yes.”
Professor: “Well, that’s where we are. You say we’re on the brink of destruction, and you are right. But it’s only on the brink that people find the will to change. Only at the precipice do we evolve.

The day the earth stood still

"People don't change when they see the light; they change when they feel the heat." (source unknown)

I like that. I am going to use it and credit the source as unknown.

Even for grass raised cattle, a few weeks of corn will improve the flavor of the meat.

It depends. I prefer the flavor of grass-fed beef, having had the opportunity to compare.

Your tastes may vary...

(self-removed weak comment)

[...], their poop and urine gets concentrated in one place and pollutes air and water, they are given loads of the same antibiotics humans use so that resistance sets in [...]

And there's acid tolerant E. coli in the poop of grain fed cattle.

Great article Chris, and great threads here. Considering peak oil, peak credit and peak environmental services (but definitely not peak dollars), I see owning long-lived, value-producing assets as a core diversification strategy...and Farmland is #1 on my list. (Disclosure, I run www.FarmlandLP.com, which acquires conventional farmland and converts it to organic, sustainable farmland).

Several principles for generating real long-term wealth:

1. Diversification. Diversification as an investment principle is often misunderstood. A diverse stock portfolio is still subject to a crashing stock market. A diverse pool of AAA bonds is still subject to housing price crashes and general credit risk. To get real diversification, you need to hold a variety of assets including those beyond normal stock and credit market risks.

2. Long-lived assets. I am a fan of oil and energy as long-lived assets, however the resources and the rigs deplete/depreciate over time. Farmland and metals are some of the few non-depreciating assets.

3. Value-generating assets. Factories, buildings, equipment, natural resources, and farmland all generate value which is readily converted into cash at whatever happens to be the exchange rate at the time (whether it be Dollars, Yuan, Ameros, Petrodollars or Gold). The lower on Maslow's hierarchy, generally the more inflation-protected they are (people will spend a larger proportion of their income on essentials over time). Gold, while being a good "store of value" and easy to exchange, doesn't generate value.

And finally, Dohboi alluded to one of the biggest concepts above: "I don't think its safe, and increasingly I am questioning the morality of having my money, such as it is, helping to keep the wheels of a corrupt and destructive national and global economy turning." I would add that for those who support the gold standard, they should investigate how much rainforest acreage is destroyed by indigenous people to recover a single ounce of gold.

I'm a fan of farmland for a lot of reasons, and in particular as a mechanism to accelerate our transition from high-input conventional agriculture to low-input organic, sustainable agriculture. While Jim Rogers is a big fan of farmland, he's focused on conventional agriculture in Canada and Brazil. Thus, he's still exposed to the risks of oil, high-cost inputs, transportation, and at least in South America, geopolitical risk.

So by acquiring domestic farmland and converting it, I think we get the best of both worlds -- doing a good thing, and getting the benefit of the asset whether all the risk scenarios play out or not.

Craig Wichner

Oil is a no brainer. Farmland in areas that get enough precipitation is a no brainer. Alternative energy you have to do some work picking but again the theme is a no brainer.
I know that it is entirely dependent on the condition of the land but........How long does it take to reclaim and improve wrecked farmland?

Re. Wrecked farmland. The answer is "it depends," which is unsatisfying so I'll give some parameters.

The U.S. National Organic Standards require conventional farmland be placed into a "transitional" status for three years before being certified organic. During those three years organic practices are employed and this reverses much of the damage but perhaps not all.

Some soils are so degraded that they can't go organic "cold turkey" and must be weaned off of chemicals for 2-3 years (akin to methadone treatment for heroine addiction?), then go into transitional status for 3 more.

The rate of soil recovery can be enhanced using biological treatments, such as compost tea applications, which essentially work by rapidly restoring a living and diverse soil biota that synergizes with root exudates and dead organic matter.

In places where really nasty circa 1950s and 60s pesticides were used the residue lingers and may last decades.

It looks like I have a lot to learn.
I always knew that to be a successful farmer you needed to be pretty smart and I think that finally that profession is going to get it's due respect.
I am in Texas and there is no way without irrigation farming is possible but I guess that is true for the Imperial Valley as well.
I was thinking that the North East would be the best farming area all things considered. Do you agree?

You might find a group near you like this one..


I wonder what the appropriate crops are for your climate. I'm sure there are right and wrong plantings..

That is where I live..Austin. Thanks

Move while the moving is still good to someplace where water is plentiful and the climate is less extreme if you are seriously interested in farming and think you may need to support you and yours by the sweat of your brow.Every ball that you must juggle to farm makes the juggling progressively more difficult,and you will be in one hell of a spot in a drought in Texas-Boone Pickens has already publicly stated his intention of getting even richer by shipping water to your town.

The northeast has thin, rock soils due to past glaciations. The cotton belt of the deep south, and the ohio river valley are much better locations.

(off topic so removed!)

Gold is going crazy because people don't know what else to do and it is easy to just buy a gold ETF and act like you are hedged and smart.
The thing about gold is you can't put enough butter on it to make it taste good and it doesn't burn very well.

The thing about bread is that it doesn't have much of a shelf life. Therefore it's store of value is zero. Grains are only slightly better since storing them safely for long periods is dependent on having some money. Gold has always been money, much longer than bits in a computer or pieces of paper. You will soon get a good education on why gold is money and the $ is not...............

By the way, a gold ETF isn't gold and you aren't hedged by owning it. You either have real gold or you are out of luck when it's crunch time.

I understand your point well. I just think that in order for any money to have value there first has to be goods or services to give it value. i think that some sort of barter will be just as effective and I have two other not so precious metals that may become very precious in the near future..........lead and brass in quantity.
Another point is that there will be so little gold in circulation that it will be hard to use it as a currency especially in the minute quantities for daily exchange.
Really silver has usually been the everyday money not gold.
Gold has been used for large transactions.
So for everyday transactions I think bartering with small items that have utility value like my thousands of lead brass combinations.

Real money generally doesn't circulate, the fake stuff does (see Greshams Law). The current fake stuff is facilitated by computers but eventually will not be acceptable due to a lack of electricity to run the computers ubiquitously. Real money is wealth and has no need of circulation. I have plenty of substitutes ready to roll but none of them are numbers on a screen or bits in a computer. By the way, I do have an excellent collection of knives. They are IMO a much more effective way to deal with an opponent than a gun. I would also not consider you a very good trader if I had to deal with you at gunpoint, that would seem to me more like robbery than trade. Now if you want to trade me bullets for stuff, I have no use of them since I don't have a gun. Furthermore, it seems to me there are a huge number of different types of guns and bullets which tends to make them very non-fungible and not very useful for money and trading.

Some, such as military and police calibers, are much, much more popular than others and yes I meant trade ammo not rob people. I guess it depends on how bad things get. I don't understand how money is useful as a medium if it doesn't change hands though??? There are also shotgun shells 12 gauge very ubiquitous.

Real money is not wealth. It is a proxy for wealth and depends on people accepting it in exchange for real value. It is still just a confidence game albeit a much better one. If I don't think that someone else will take the gold in exchange than I won't accept it for value.

Exchanging value for value requires real money like gold. Silver coinage has almost always been demonetized, there was always a lot of it. Gold is good for jewelry and so splits its use between money and decoration or a store of wealth as in bars. So gold isn't really a circulating medium but it will change hands as needed. You referred to that earlier in you comment about bigger transactions. The circulating medium is usually not equal in real value to it's face value. The content value of money will change depending upon what the content is, even gold can do that. In the 1860s gold was worth way more than $20/oz because of the printing of greenbacks.

The other limitation as money for bullets and other consumables such as grain is that they get used up, they cannot really be a medium of exchange. They are something with utility outside what you are wanting to use them for. Gold and silver don't suffer that problem. They can be turned into jewelry but don't have to be whereas a bullet needs to be shot to be useful, it cannot just be a medium of exchange, that wasn't it's function to begin with. That is why gold and silver have made such great money over the years. IMO..............

Exchanging value for value requires real money like gold.

Except for barter.

Don't argue, he is a gold bug.

As weapons go,there is nothing that compares with a signle or double barrel breech loading shotgun-the kind that "breaks" in the middle to load and unload it.If kept clean and rust free such a gun will last virtually forever,the chance of it failing to work is essentially zero,and it it suitable for every thing from deer and black bear when loaded with buckshot to rabbits and sqiurrels loaded with birdshot.

The effective range with birdshot is around fifty yards and the smaller sizes of birdshot won't penetrate skin at one hundred yards,but at very short ranges a shotgun is just about as deadly as an assualt rifle-this combination of properties make it the best choice if you MUST fire in a situation where there is danger of hitting an innocent bystander.

Buckshot is dangerous at a quarter of a mile but you are unlikely to actually hit anything deliberately with buckshot at ranges over eighty yards.

Any and every store that stocks ammo will have 12 gauge shotgun shells,and the paperwork involved in owning a shotgun is nonexistent to minimal compared to other guns,especially pistols.

This type of shot gun has been THE weapon of choice for generations of farmers who could afford only one all purpose gun.

Prof. Goose,
I see the obvious point that energy will be the best investment going into the future but commodities in general will only be a place to be because of the destruction of the dollar and not necessarily because of industrial demand.
I have long been a huge bull on energy but because of currency debasement but because of the dwindling supply with little elasticity on the demand side.
Other commodities seem to be nothing more than a store of real value in an environment that will see destruction of abstract paper assets.
If you think about it, items with a lot of embedded energy that are already built might become very valuable because of the cost of replacement which by the same token should put a premium on repair services. Now my stream of consciousness is off on a tangent.
Anyway what do you think?

You might particularly consider 'UsefulHigh Energy Materials' .. there are many around us that are generally looked at as junk 'because they're used', or scratched, etc..

I think of the bounty of parts in a typical VCR from 15 years ago. Just the transistors and diodes, while we're still swimming in them, these are very powerful tools, and extremely versatile means for accurately controlling minute amounts of power.. and seeing as power is the thing we'll be very interested in spending very carefully before long..

I've mentioned it too often here, but I'm also convinced that glass and mirrors are a great pair of materials to have handy. Durable, generally non-decaying.. Can capture heat, deflect water, handle all manner of chemicals, mirrors can give you 2,3 or more suns, when you only started with one.

Stainless steel fasteners,

Bike Parts,

Lubricants, Adhesives, Solvents,

There's just so much still getting thrown out that is completely undervalued. Forget Toilet paper.. look around your house for the things you really take for granted that AREN'T easily substituted.


Thanks. I already think along these lines but never thought about mirrors.
I keep old electronics and every now and then find a use for a component. The last thing was a A/C control board that cooked a resistor that I happened to have.
Most of the time it is a bad solder but you are right about how parts that are considered throwaways now becoming valuable.
I wonder if there is a way to preserve bike tires?

Put your rubber items in the coolest darkest place you can find and protect them as well as you can from the atmosphere.I can't say exactly how much this helps,but I have pulled a tire out of storage in such a place(dirt floored basement in a dark corner) that was over ten years old that showed no signs of deterioration such as cracks in the rubber.

Steel pipe,beanms and angle iron are easy to buy at scrapyards locally for 15 cents per pound.Retail steel is five times as expensive-AFTER the market collapse.

My stash is getting to be pretty impressive-but then I have more use for it than most people.

But it should serve very well indeed as a barter item later for anyone who can set some aside-and sometimes it's free for the hauling.You need to put it on blocks and cover it up if possible.

Welding equipment and acetylene and oxygen to go along with all that steel.
As a farmer I am sure you are a pretty good welder.

Nice work Chris,

Suffice to say that I still have very low expectations that our national leadership will offer any tangible, effective methods to significantly reduce our consumption of petroleum.

That is because, as you allude, not many if any at all in government (Roscoe Bartlett?) truly understands the relation between energy and economics.

...we are going to continue to go through wrenching cycles like we experienced over the last year. Spiking energy and commodity prices lead to destruction of the economy, which then gathers itself at a lower overall level until prices spike again, and back around the wheel we go. As energy declines, the ceiling will get lower and lower, and it will take more and more money to buy the same things.

This seems right on target to me, and understanding that spending discretionary energy [not money per se] will bail us out of each sequential "destruction of the economy", the question then becomes: "Will the economic ups and downs in the future be more or less turbulent than the one in the past year as society's ability to attain NET [discretionary] energy falls off a cliff?"

Dave: That is indeed the question. I admire your efforts to get a quantitative handle on that. I don't have a strong reasoning on it but this graphic that Gregor dug up feels about right to me:

Inflation is and always has been a monetary phenomenon. Our money supply is NOT increasing because our money supply is not just what the Federal reserve hands out. We've just lost almost the entirety of our shadow banking system and no amount of "massive money printing" (at least nothing that we've seen yet) could even come close to filling the gap.

I would suggest that the real "in-de-flation" lies in the fact that the Fed and .gov are trying to re-inflate the economy by pumping vast sums of money into the financial system that is merely canceling out the debt that would have defaulted. We're inflating bankers and deflating the rest of us. Where do you think all the money going into commodities is coming from? Hedge funds? How about the mother(s) of all hedge funds, the former investment banks. GS and the like are getting HUNDREDS of BILLIONS of dollars in bailouts, direct and indirect. Who is it that is filling tankers with fuel oil and paying to have them sit offshore? JPMorgan.

I think it adds to the confusion to try and define inflation and deflation in the context of energy.

*Thanks to Karl Denninger and Stoneleigh for helping me get it finally.

Yes, but it is an assumption that the Fed and the USA guv is trying to stimulate the overall economy (re-inflate)-so far they have done very little other than transfer taxpayer funds (future liabilities) to the connected. Obama has pushed this so far that now opposition to his Fed crony power consolidation scheme is even coming from Dem politicians.

I understand the Austrian school definitions but I try to use inflation and deflation in the commonly used senses of the words (prices going up and down) for my audience, because it's simpler that way.

However you want to say it, the scenario I see is that the overall economy shrinks and most assets devalue at the same time that food and energy prices go up--a squeeze play.

Inflation, always inflation. The money isn't tied to anything concrete,so the polticians will just keep pumping more of it out. If pumping money into the banks doesn't work, they'll bypass them.

The shadow banking system never created a dime of money. That is only in the purview of the banking system. A mortgage isn't money. When someone sold a house for $650,000 that they bought the year before for $500,000, no new money was created. All that was done is to attach a larger obligation for payment on the house. The banking system liquidated the transfer of the debt to the bigger sucker and it took a larger amount of short term money to facilitate that. However, the loan was still for 30 years, it was just $150,000 bigger but no new money was ever created as a result.................

The fact is that M1 has increased 20% in the last year and that is inflation.

Not at all.

Real, effective money supply is M1 * (velocity of money). In a recession, velocity of money goes down, so M1 must go up to prevent deflation. The Fed has been doing this for about a year now. When the velocity of money picks up, they will draw down M1, and nothing much will change. The shadow banking system (I hate that phrase, but whatever) did really increase the velocity of money, hence its winddown is very relevant from an inflation/deflation standpoint. The FED has done a very good job of stabilizing the financial system, and has started to wind down their programs by charging higher interest rates, pushing people back to the market for future borrowing needs. The Fed funds rate remains low, but the more exceptional programs (TAF and TLGP, though that one's done by the FDIC) are raising rates and utilization is going down.

And for the record, Austrian economics is the biggest croc to ever come out of academia, and that's saying something. If you use Austrian economics to predict the future, you will be wrong nearly every time.

And for the record, Austrian economics is the biggest croc to ever come out of academia, and that's saying something.

I once spent some time trying to get a handle on the basics of Austrian. Maybe I looked in the wrong place, because I found the jargon to be quite impenetrable, and dare I say, the thinking to be wooly, and no hints at anything I'd consider to be scientific.

At least I did find what appeared to be a central repository of "The Truth According to The Austrian School". More than I can say for neo-classical.

If you use Austrian economics to predict the future, you will be wrong nearly every time.

In respect of predictive power, surely the Austrian School is not so different from neo-classical.

I don't know all the details behind the Austrian school but one of their main tenets is a "sound currency". This to me means gold or some other commodity. That is lethal to economic activity in the long run because it makes the currency the most valuable thing to hold. Also it allows for concentration or hoarding of the commodity currency. It would be like a poker game......someone in the end ends up with all the chips.
I think that a dynamic money supply is essential in a monetary based economy because of these reasons and that Keynes didn't have a bad idea at all.
The problem with Keynsian economics was/is that no government ever does the second part of the strategy which is to drain the money back out during the boom in the form of higher taxes to run a surplus and damp out the upswing to reduce the amplitude. If it was applied as intended it would act like a shock absorber on the business cycle and reduce the amplitude of the cycle. All my opinion.
Some may say that the Clinton administration did drain the money and ran a surplus but that was nothing more than a huge windfall in short term capital gains taxes from the phony dot com stock trading bubble.

We’re entering uncharted territory while the risk of peak oil is still priced at approximately zero.

It's pretty scary when you have experts and old hands lining up on both sides of the inflation/deflation debate, with seemingly strong arguments. It reminds me of the congressional hearings during the Great Depression when economists argued about whether the problem was overproduction or underconsumption.

My own hunch right now is that we will oscillate wildly between these regimes over the next 2-3 years, with the ultimate push toward deflation as consumers increasingly stuff cash and gold bars into their mattresses to ride it out. A bit of dramatization, but generally what I'm expecting.

Back on June 16th 2008 I posted this: "Can you say contractflation". Just working on first principles!

Question Everything

I think you've chosen the best term to describe the situation there. But I'm not so sure it needed 1000+ words to explain it when it does a pretty good job itself in one!

Interesting how the post and comments is/are very US centric. The financial "crisis" is a phenomena of levered economies, though obviously there are in the short-term spill over effects to non-levered economies.
Energy, and specifically oil due to its versatile nature, can be viewed as a "gateway" commodity. Without it other commodities are almost impossible to attain. No increase in inputs means that you can't have a sustained increase in outputs. In the short term technological advances as seen through increased efficiency output may increase but there are limits to that.
I agree that with the observation that inflation is a monetary phenomena and/but I wonder how globally inflation is distributed. That, viewed in combination with the local quantity of oil consumed may yield an interesting dataset.

A few bright bulbs in Congress suggested last week that we exchange 70 million barrels of light sweet crude oil from the Strategic Petroleum Reserve (SPR) for an equivalent amount of lesser quality heavy sour crude, in an effort to dampen oil prices. Aside from being a fundamentally bad idea, I continue to believe such a move would be utterly ineffectual. The maximum official rate at which the SPR can be drawn down is four million barrels per day, but I suspect the actual rate would be far lower. In any case, the price difference between the two grades of oil is fairly small, and the value of the swap would virtually disappear within a flow of 84 million barrels a day of globally priced oil.

Totally wrong!--IMHO.

At the time heavy sour crude cost a lot less(+$15 a barrel) than light sweet and due to the fact that the US gets a lot of dirty crude from Venezuela
and Mexico we can process it easily(others cannot). So the Congressional suggestion seemed spot on when crude was over $100 barrel. The fact that +$100 oil didn't last seems irrelevant.

When oil prices get high again, this should be exactly what we should do.

In the future ALL oil will be heavy and the oil companies should deal with the reality of that.

"Totally wrong!" majorian? Then show me the math that explains how 1-2 mbpd swap of light sweet for heavy sour will bring down oil prices.

It's awfully complicated--supply and demand stuff (snark).

The government buys the heavy oil for $15 less than the WTI price.

Let's see. SPR = 700 million barrels, assume all light crude, at $100 a barrel, sell it all and buy Mexican-Chavez muck
that's $10.5 billion dollars saved.

It will even bring down the Brent price because people know the US gov't won't step in to buy light crude because of the policy.

About 6% of world oil production is heavy oil(<20API:>8API, and not Orinoco or bitumen), not including tar sands. The USGS estimates that there is 952 Gb of conventional oil and 434 Gb of heavy oil.
That leads to the calculation;
952 Gb/ 25.7 Gba conv. oil= 37 years of conventional left.
434 Gb/ 1.6 Gba heavyoil = 271 year of heavy oil left?!
1286 Gb/ 27.3 Gba total =?????????

Doesn't it look like heavy oil needs to be developed sooner rather than later?


The Chinese are getting into heavy oil with their offshore Bohai field but most other folks don't look too interested.


Perhaps the mathematicians at this board can create separate light/medium and heavy oil peaks(material for a new article?).

All that and you still missed the time factor. Never mind.

Here's Professor Goose:

The affordability of oil, as measured by the S&P500, peaked in 1999, and has been in decline ever since. Oil prices began rising sharply at that time, as the early effects of peak oil began to be seen. Global conventional oil production has been flat since 2005, despite a tripling of prices.

Here's Euan Mearns:

Whilst global GDP has shown near linear growth since 1969, the negative impact of high energy prices on the non-energy economy is clearly shown for the three oil shocks (1973, 1979 and 2008). This exercise also affords the opportunity to plot the ratio of total GDP over total energy cost which I have called the Financial Return on Energy Invested (FRoEI) (Figure 5).

Figure 5 FRoEI estimate for global primary energy consumption, 1969 to 2008.

One thing that struck me from doing this was that the FRoEI figures are of similar magnitude and range to ERoEI data. The second oil shock of 1979 caused FRoEI to fall from 10 to 5 and a major recession followed. Since then, FRoEI grew rather steadily to 1998 where values over 30 were once again attained. Since then the ratio has declined registering a fall from 8 in 2007 to 6 in 2008.

Here's ME:

Saturday, May 30, 2009
The End of the Auto Industry..

Economic Undertow

The automobile industry and the governments which love it are all living in a fools' paradise.

Just like Romeo and Juliette.

- The fuel for cars of the future - like five years from now - will not be available. The current crisis has its basis in the fact that dollar for dollar, the availability of petroleum fuel peaked (Peak Oil) in 1998. The US has been on the down slope of petroleum availability for ten years. In a deflationary context - that is, higher value of currency measured against most goods - oil is currently over 500% higher than it was in 1998-99: $66 against $12. This increase in cost matters a great deal.

- The developed world's economic infrastructure was developed upon assumed energy inputs costing less than $20 per barrel for oil ... in perpetuity.

- Like ALL modern industrial production, auto manufacture is energy expensive. Energy is embedded in every link of every product's supply chain. The increased energy costs of manufacturing cars has destroyed industry profits, even as other costs have declined or remained flat. This is why the auto industry is failing. Eventually, even low- wage countries will not be able to afford the total input costs of manufacturing cars; that is, labor, plus capital plus energy. Only hand- built and craft- built cars will be made, for emergency services, some businesses and millionaires. Here, the energy component will be replaced with skilled human labor and the fnial price of the product will not matter.

- Private automobiles will join private aircraft as unaffordable toys. There wil fewer and fewer cars, most claimed by careless driving and the remainder by increasing unaffordability of fuel.

- The auto- centric 'American Way of Life' is also dependent on extremely cheap fuel. The costs of sprawl and its services: utilities, maintenance, personnel, management and financing are unaffordable when added to $50 oil. Sprawl- related growth costs are a primary reason for municipal and state budget woes. The auto industry has successfully put its support structure out of business by efficiently depleting the natural capital upon which it most depends!

- Depletion of energy sources provided the incentive to replace energy costly manufacturing with financial services and high factory wages with bank credit. Business bought some time by sending US jobs to Mexico and China since high wages plus high energy cost meant business failure. However, the lower domestic wages and excess credit could not permanently support the asset inflation necessary to continue funding the experiment.

- This auto manufacturing crisis is the tip of the iceberg. The demand for fuel will effect food prices - and has done so already. Higher food prices will be compounded by shortages since food is grown with and by petroleum and shipped in trucks which run on petroleum. This will be annoying in the US and other developed countries but catastrophic in the 3d world. Continued auto consumption is more and more becoming an ethical issue. Do we have food for humans or food for cars?

Hello! In dollar for dollar terms ... what matters most ... Peak Oil Happened in 1998! While we were sleeping, it happened.

It's over, it's finished! We are now on the downslope, there is no 'time' there are no alternatives. We screwed around - and are still doing it; the industrial economy is coming down around our ears. It doesn't matter how much gooey stuff comes out of the ground. The difference in output between 1998 and now is fairly small. What matters is the markets. The markets have changed. The suppliers hold the balance of power over consumers. Unless vast, new non- OPEC resources are brought onstream tomorrow, the ability to set prices will reside with producers.

The only way for the markets to moderate is if there is economic collapse. If that isn't a sign of peak oil, I can't think of a better one.

The next shoe to drop is the US states. Most are insolvent. States cannot declare bankruptcy, but they can default. When California defaults (the world's fourth largest economy) the next leg of deleveraging will begin. Unlike the last leg, credit has already been nationalzed and treasuries and central banks have expended what liquidity ammunition they possessed.

Suffice to say that I still have very low expectations that our national leadership will offer any tangible, effective methods to significantly reduce our consumption of petroleum. I certainly do not see them coming to grips with the near-certainty that by 2012, the world’s oil supply will go into terminal and relentless decline.

For all practical purposes we are in terminal decline already. Our political system is broken: compromised by those who actions are to be regulated by the government. I cannot see a good outcome out of this.

More inflation/deflation here:

With oil prices heading solidly toward $75 a barrel, and the 10 year in a year long bear market - with the dollar getting thrashed in consequence - the inflation case seems pretty convincing. Traders believe the US government is willing to sacrifice the dollar in order to save the growth potential of the status quo:

The EIA price (Cushing, WTI) is nearly at the level reached by the long- term surge from 1998 to 2007. If the price level of approximately $78 is breached there are technical reasons for the price to re- test last years $145 high.

Chart by Stockchart.com

This chart indicates the long- term decline in price for 10 year Treasuries. This decline in price would suggest inflation. Added to the increase in crude price and the ripple effect taken out of context is clearly part of an inflationary spiral. The government's- and Fed's strategy to monetize housing prices and sovereign debt are succeeding. One only has to read the New York Times, Wall Street Journal, listen to CNBC and other mainstream media outlets. The issue of the day is the need for the Fed to consider how best to combat this inflation before it accelerates out of control.

None of this is convincing. Without an increase in wages or some mechanism to put 'liquidity' into the hands of the general public, the rise in credit costs and energy are not inflationary but instead sharply deflationary. The increase in 10yr yields has effectively put the mortgage re-fi industry on hold. While a housing 'recovery' isn't completely off the table, the increase in mortgage costs pushes any recovery farther into the future. Unsecured personal credit is also disappearing. Finance companies are steering away from lending to individuals. Credit reform measures are shifting risk costs to banks away from borrowers, who cannot afford more risk at any price.

Continuing decliines in housing prices have closed the home- loan ATM. Foreclosures are increasing and more homeowners with means are losing their investments. None of this is inflationary.

Banks are hoarding reserves. Customers aren't borrowing and those that are are simply rolling over existing higher rate loans. Increased money costs reduce the refinancing incentives. None of this suggests the ability of business to pass along increased costs to customers, in fact the greater likelihood is for increased costs to increase business bankruptcies.

Regardless of slowing rise in unemployment claims, the overall rate of unemployment continues to increase. The total of hours worked is declining. The un- and underemployed cannot add to the wage- price spiral. Increasing costs of goods and services due to increased credit and energy costs simply shrinks the market for these.

The mechanism driving oil prices is both technical and administrative. The influx of liquidity into the markets has inflated some asset (stocks) and commodities prices. If there was any chance of inflation, the stock markets would be falling and most bond yields increasing even more sharply. At some point along that trend, borrowing would become expensive so that credit would be rationed. Put another way, there is some unknown yield point where what is being priced is not inflation but default. This is dangerous because nobody can say what that yield point is!

Chances are it is a much lower yield than market professionals would consider. The massive overhang of sovereign supply amplifies risks to the downside. The Fed - and the rest of the bond market - could find itself in an uncontrollable feedback loop rapidly amplifying yields.

The price risks of oil - and other commodities - to the general economy are also increased. The price point where oil costs start shutting down the overall economy is unknown although it is probably far lower than oil traders and producers have suggested. The market for crude like the market for debt has its own dynamic.

Excellent rant.

"Hello! In dollar for dollar terms ... what matters most ... Peak Oil Happened in 1998! While we were sleeping, it happened.

It's over, it's finished! We are now on the downslope, there is no 'time' there are no alternatives. We screwed around - and are still doing it; the industrial economy is coming down around our ears. It doesn't matter how much gooey stuff comes out of the ground."

This should be repeated millions of times on every web site...

They say lies repeated enough times become defacto truth. Perhaps this kind of hard truth repeated enough times will drive the nail of reality into our collective skull.

There's a simple rule: You say it again, and you say it again, and you say it again, and you say it again, and you say it again, and then again and again and again, and about the time that you're absolutely sick of saying it is about the time that your target audience has heard it for the first time.

-- Frank Luntz, Republican political consultant.

Now that 'American Idol' and 'Britain’s Got Talent' are over for the season, what does any of this oil crap have to do with the new really important stuff on 'CSI: Miami', 'Deal or No Deal', ‘Sponge Bob’ or 'As The World Turns'?

That, my friends, is why I am learning to garden. So how big is your garden? If it is in a herb pot or less, you are just BSing yourself and the rest of us about how important you think PO is. Even here in the high desert, we are harvesting radishes and scallions with a bumper zucchini crop (always) on the way. Tomatoes, asparagus, cucumbers, other squashes, yellow onions, etc. are coming along. My neighbor to the north is in charge of chickens. Look up ‘Chicken Tractor’; a wood and wire project where I come in with the wood shop, in association with the garden. Just a few miles northeast of here are wild horses. That will be very important in a few years. Next year there will be about 10000-15000 feet of raised bed community garden on what used to be our fenced llama pasture. We have two wells to water it and two solar well systems in case the grid fails.

I hope you don't don't think me rude, but what are you doing besides yak, yak, yak to insure your family's welfare after the cliff.

Somewhat limited in the city here, but I still manage to have a couple hundred square feet of gardens. The big thing here is working with the city to try to open as much land as possible for community gardening. There is a huge demand. One bottleneck at this point seems to be good soil. I'm thinking of stepping up my composting efforts with inputs from local coffee shops, barbers/salons,restaurants...

Just to clarify, the first quote was from me, not PG.

I thought it interesting and encouraging that Euan and I were chasing down the same rabbit this week, without having spoken to each other for quite some time. (I always enjoy finding myself on the same side of a question as Euan.) From his excellent post a few days ago:

A crucial question that follows from this is what energy supplies (fossil and other fuels) can be accessed for $100 / bbl? With reports that finding and development costs for oil are running close to $80 per barrel, it seems that we are approaching the point where new fossil fuel supplies may be too expensive for our economies to bear.


It now seems possible that we have reached an inflection point in economic history, where the price at which energy is high enough to sustain new production is the same price at which things become too expensive, leaving us no option but to downsize.

Euan seems to think the gap will be filled by greater efficiency, both in this recent post and in his excellent study with Luis de Sousa last year: "Olduvai Revisited 2008." My bet is that it will be filled by a shrinking global economy and, by extension, a shrinking global population. I reference that study in my new piece out today at Energy and Capital: http://www.energyandcapital.com/articles/seven-paths-to-our-energy-future/901

This is the technical way I explain it http://campfire.theoildrum.com/node/5473:

As soon as the economy tries to heat up again, which we call increasing DEMAND, it will be capped on the knees by the henchmen Mother Nature hired. She will not extend us any more credit since we have done a poor job with the first loan.

I created this graph to show that the price of oil had to be high enough to push people to alternatives, but not so high that it damaged the economy.

Magic Price Incentive Band

But I think it was Steve from Virginia who pointed out that it was merely an assumption on my part that the lower price level wouldn't itself cause damage to the economy, which is another way of saying what's being said in this thread.

Sorry Chris. My mistake ...

Lessee ... dealing with the future ... it seems to have been swallowed up by the past.

It seems that we are approaching the point where new fossil fuel supplies may be too expensive for our economies to bear.

Similar to a discussiion that aangel and I had a few months ago about the cost of alternatives being higher than the price level where the economy crashes. The idea is in the air, so to speak.

the price at which energy is high enough to sustain new production is the same price at which things become too expensive, leaving us no option but to downsize.


The Energy and Capital article is very interesting. I don't think there is any chance of organizing a response. Our leadership is completely in the thrall of large business interests. These have to be cleared away before any action can take place. By the time this clearing is done, the ability to organize may disappear.

I believe that most of the peak oil issues revolve around automobiles. Any energy regime that does not include getting rid of most if not all automobiles will simply fail. This includes electrics, banana- powered, CNG, rubber bands ... whatever. When the cars go, a lot of energy problems will go, too. BTW, failure means all the autos will go, anyway.

Viewed optimistically, peak oil is a problem left alone will solve itself, just like overpopulation or climate disruptions will also solve themselves. The world will endure.

Will we?

In the end, efficiency won't matter since it isn't a primary factor in a very simple production/consumption context. Efficiency means a power supply will be exhausted more slowly than otherwise, but what really matters is that the power supply will indeed be exhausted. The supposition that some other transformational activity will take place during the 'efficiency interval' is not borne out by observation.

Nate Hagens just re- posted his elegant (and introspective?) piece relating human brain function and energy consumption and it reminds me that (sorry Nate) humans are idiots who generally do the wrong things at the wrong times and are basically (self) destructive. They do so just to be so! Most people are miserably unhappy, have no dopamine function at all and simply live out of mimic and spite. The most common human emotional state is rage and the second is hatred and the third would be a form of dull, muted resignation. That the world is in its current broken condition is not surprising, it is that total destruction has been avoided for so long is the surprise.

This would leave me with the shrinking economy/population camp rather than with greater efficiency. It's not so much that I don't believe in its potential, I jost don't see great efficiency gains ever taking place in the real world. There is too much sunk capital; too much mis- investment. Meanwhile, the economies have already been shrinking, disguised with statistics, cheap credit and outright lies. The time for that is over; the new paradigm is more menacing:

What is most destructive outcome for the greatest number is the most likely.

"Without an increase in wages or some mechanism to put 'liquidity' into the hands of the general public, the rise in credit costs and energy are not inflationary but instead sharply deflationary."

It is the assumption that no such mechanism will be employed that I question. True it would be as "absurd" as bailing out people facing foreclosure rather than bailing out banks doing the foreclosing, but these are strange times. The conservatives believe that having eliminated unions as effective players has eliminated this treat. But the working class could still wake up.

Could steve or anyone here expand on quite what could become of the insolvent state of CA etc, if not being declared bankrupt. I guess by defaulting you mean they would fail to pay creditors. Would they not also drop thousands from their payrolls and contracts, thereby greatly impairing the efficiency of the community/economy? With vicious circle knock-ons? Potentially to the extent of knocking it out entirely?
Could defaulting bring about a collapse of confidence such as to make the state financially dead?

My analogy is that California is to the other states as a train engineer is to the other people on a train, in a train crash. California and the engineer are the first to arrive at the scene of the crash.

Well thanks for the analogy, which I guess suggests that wise people elsewhere will look with interest on the next few months of CA experience to point to what's coming their own way in due course. Not clear whether you mean by your analogy that CA is going to be killed whereas those further back (later on) will survive.

Anyway your reply still didn't answer any of my questions so my thanks is grumblingly granted for now.
PS--you don't seriously refer to train drivers as "train engineers" over there in la-la land do you? Do they have to get out with a spanner every few miles?

I don't know about current practice, but historically the drivers were also the chief mechanics and needed to be able to improvise as well.

So yes, Engineers.

CA did this to themselves. They essentially put out ballot initiatives asking (in different language) "do you want us to default on our debt", and the public answered a resounding "YES", so there we are. As near as I can tell, no other state is so heavily loaded with dirty hippies, so other places are not likely to have these problems. CA would be fine if they had sensible government. That is likely what the outcome of a default will be. They will default on their debt, and will need to go to the people and ask "Do you want a functioning government", depending on how the people answer that question, we could have very different outcomes. The days of Reaganesque borrow and spend are probably over for CA, and it's a good thing too.

It is OK for a government to borrow in bad times, but the problem here is that good government is no longer a Nash equilibrium in a world in which the government can borrow. The irresponsible pile on the bills and make their constituents happy, whereas the more responsible try to pay off the bills and get blamed for all the hardship this causes people. As a result, anyone attempting to be financially reasonable is almost certain to lose office, whereas those that drive the system to disaster are reelected without any troubles at all. If governments were forbidden to borrow, this problem would not occur, but such a government would be far less economically efficient than an ideal government that did have the ability to borrow. So, do you take a little economic damage for certain by prohibiting the government from borrowing in bad times, or do you take your chances by letting the government have more freedom, and hope it doesn't screw you in good times? These are the questions we have always faced.....

All those dirty hippies, OUCH!

I don't think they are the problem. It's more like sprawl and more sprawl, requiring schools, firehouses, police stations, courthouses, streets and sidewalks, school busses, and the people to man them.

California has a disfunctioning state government, but so do most (fill in the blank). UK, New York, China, Latvia, Jefferson County, Alabama ... etc. In good times governments do not think revenues - based on incomes or real estate values and retail sales - will ever drop.

Technically, CA could be in default by next week:

California set to issue IOUs as fiscal crisis weighs
Wed Jun 24, 2009 10:00pm EDT

By Dan Whitcomb and Ciara Linnane

LOS ANGELES/NEW YORK (Reuters) - California's controller said on Wednesday that he would have to issue IOUs in a week if lawmakers can't quickly solve a $24 billion budget deficit, and the state's treasurer plans to tap a reserve fund to meet debt service

In the Great Depression there were many municipal defaults but only one state (Sorry, I don't remember). All of these were on debt (bond) payments that were ultimately made current with interest. The Depression did end, after all. This is what is troubling about the current situation. The condition of over- indebtedness may be permanent, leading to repudiation.

It is hard to determine what this would be like. The only period of repudiation of US debt was in the 1870's after the Civil War in previously Confederate states.

A problem with states is that they are given sovereignty equal to the US government as a Constitutional right. This makes it hard for the US government to assume state indebtedness or otherwise 'bail out' the states. Again, as this current 'crisis' is more a change in conditions rather than a temporary economic setback, the likelihood is that any defaulting state that does not make more or less permanent edjustments to its spending would represent an endless drain upon the Federal Treasury.

In fact, looked at in comparison to the period of the 1930's, the California debt burden is more profound, its expenses orders of magnitude higher and its various municipal, city and county liabilities far more systemic. California's pension expenses, its salary levels, its liabilities to labor unions - particularly prison guards - are unjustifiable against the current revenue shortfalls. California - and most other states - made the bad bet that real estate values would continue to rise unabated; it was that miscalculation, not a hippie dirt explosion that has put the states at the edge of the abyss.

What happens next? The CA governor has threatened to shut down offices and furlough workers, release prisoners ahead of schedule. California voters did exact an 18% pay cut for state legislature. If the state cannot pay interest on any due issue, the result would be a freeze in credit to the state. The likely outcome is that the state would fire or attempt to fire thousands of employees in all state services. Parks, schools, highway maintainence, street lighting, welfare and health services would be shut down, some temporarily ... or permanently?

Localities can declare bankruptcy to void union contracts with municipal employees such as has Vallejo, CA. Municipal worker contracts for firefighters, police officers, maintainence and other workers were very generous during the past ten years. The outcome is for services to shrink, leaving residents with skeleton police and ambulance service, closed hospitals and libraries, overcrowded classrooms, and a general rise in unemployment, as the state and city governments abandon their roles as employers of last resort.

The bottom line is that the state face a period of austerity. Paul Krugman suggests that state governmemt stringency - states are generally required to balance their budgets annually - will cancel out any Federal stimulus efforts. I disagree about the effectiveness of stimulus, but the austerity is going to arrive, nevertheless.

I just thought of this, though who knows if it is really valid or original.

Assets are used to create commodities. Land is mined or harvested etc. (ignore other assets for now). Essentially in very simple terms:

Assets + Energy = Commodity

The value of an asset is going to be related to the ROI of converting the asset to a commodity. In terms of costs, there is a cost of energy inversely related to EROEI. There is also a Commodity ROEI (CROEI) than must be factored in. Thus in terms of costs and values:

Assets Value / Commodity Value = CROEI * EROEI

That is, when oil is easy and mining is easy, the mine is worth more in terms of commodities. It simply can produce more easily. This ignores supply and demand, but hey, supply and demand economics ignores energy, so lets run with this for the moment.

EROEI is now falling globally.

CROEI is also generally falling. Mineral concentration is down, soil erosion and climate change are affecting crops requiring more inputs, etc.

Thus in terms of commodity producing assets like farmland or mineral rights, their value in relation to the commodities they produce should be declining given the state of the world. There might be individual commodities where technology efficiency would change CROEI to affect this calclulation, but the overall trend is clear.

Now the value of a commodities and assets is also related to supply and demand. Demand for commodities is likely to be increasing because the population is growing and everyone wants to consume like Americans. Demand for assets is generally down because that's what happens when leveraged asset bubbles pop.

The fact that many of the assets (CRE) only produce intangible commodities such as financial services or shopping experiences only furthers their value demise.

Thus the general trend of commodities inflating and assets depreciating is supported by my reasoning. That, of course, doesn't mean my reasoning was sound, but maybe it will induce thoughtful people to think.


This is a non-wonky, entirely human comment, so you may wanna just skip right past...

I'm that radical, punk-rock type cyclist screaming at and generally hating autos, and for a long time I couldn't care less how high the cost of oil went. Or so I thought.

But last summer when it really went freakin' nuts, I started to get concerned. I was actually relieved when the bubble burst in the fall.

Why? Heating oil.

Here in New England, A LOT of people heat with oil. We're also a fairly stubborn lot, perhaps to a fault. My fear - and I think it's a real one - is that $100+/bbl oil plus a wikkit cold winter like this past equals your Granny in Taunton frozen like a popsicle.

I said those very words at my local sustainable energy group meeting when they were discussing powerful images to promote their trade, encourage conservation and spur transitions to new options.

It's a powerful image and a hugely powerful meme, but not one we should look forward to seeing. But still, if Dr. Goose et al are accurate with these "wrenching cycles", it is an image we will in fact see.

PS. For the life of me, I so don't understand why conversations like this - and conversants like this - aren't part of the process of national economic strategerization. Crowd-sourcing from a carefully-chosen crowd, 'n'at...

The definition of inflation varies depending on who you are talking to.The official rate doens't mean very much to the average working man or woman who owns hisor her residence-every person
I have ever talked to anywhere near the bottom of the economic heap-which is spreading all the time-believes in his gut that "inflation" is at least three times as bad in actuality as in theory.It might be a good thing to remember that more and more of us are going to be at the bottom as the heap continues to slump.

I suggest that with a collapsing economy that residential rents will REALLY fall substantially as poeple start doubling up in a big way.Income taxes will also fall as incomes shrink,leaving proportionally more money in the pockets of lots of comsumers.This can really be a big thing proportionally if income drops to the near the poverty level because then very little or no income tax is withheld.Furthermore some folks will collect subsidies to raise thier incomes,either in cash or in kind-food stamps,school lunches,etc.

So with these effects softening the impact of loss of income to some extent,the real effect of commodity inflation is amplified,because the poorer you get,broadly speaking,the more you spend proportionally on commodity types of goods such as food,fuel, utilities,clothing- and services such as medical and dental care if any money is left.

Once the shit is ever once really and truly in the fan,real estate and stock prices won't matter very much except as metrics to measure misery and the possibility of change.

The things that will matter are the price of beans and bread,and keeping warm.

I'm still waiting for someone who doesn't believe in the inflation scenario to explain just why the fed vet won't force the inflation worm medicine down the dog's throat until the dog either recovers or dies of an overdose of worm medicine.

The vet doesn't seem to have any other medicines of consequence in his bag.

Most of us here seem to believe that there are so many structural problems, economically speaking,that the house of consumption is doomed to fall,and that the only real question is when.

I subscribe to this pov.

I'm waiting for some one to point out any real reason why I am wrong in believing that as things get worse Uncle Sam won't force the banking industry to do whatever the exec/leg branches want done.

And history sez what they will want is more electrons stuffed into the system, because that works in the short term.If you force enough hard enough.(This is often expressed in by believers in brute force as "If at first you did not succeed.... it's because you failed to use enough force."

If this gets out of hand the results won't be pretty ,but they won't necesaarily be worse than a continued deflationary spiral.AND they will have been delayed by a few months or years-a critical consideration by any measure.

And if it works Uncle will have paid anywhere up to maybe fifty to ninety percent of his obligation off with funny money.

How would you feel if you had sold Uncle a million barrels of oil at ten dollars per a few years back and the interest on your t-bill has not even covered half the increase in the prices of steel ,wheat or corn?

Some days I believe the average citizen is just as niave about inflation as he is about energy.

The only way that electrons get to the consumer is through wages or loans.
I think that between demographics and the mass psychological change that has occurred as a result of the implosion that people don't want to borrow anymore and want to get out of debt.
As far as wages..........they will remain suppressed due to an absolutely massive global labor pool and also illegal immigrants taking jobs here.
It is not how many electrons are in the servers, it is how they flow through the pipes of the economy.
Someone up-thread stated what I think and that is that necessities will inflate and luxuries and items that require debt to purchase will deflate.
Anything imported might inflate if other countries competitively devalue to keep pace with the dollar.
I think it is deflation until further notice for all but food and energy.

I intended to edit my above comment and add that the really nasty aspects of the inflation scenario probably will not become obvious for some time-maybe as much as two or three years or even longer,but I had a reply before I finished.

Correction.......that would be imports might inflate if other countries DON'T competitively devalue.

The history of every fiat currency says that eventually you will be right about inflation but it is more a debasement and lose of faith than goods being chased.

The only reason that the US dollar is hanging in there is US military superiority. I hate to say it but the US can go in and steal anything they want because no one will challenge the bully.

I think you are right about it being more difficult to inject money into the system via consumer debt.

However, governments may turn to direct spending instead. For example, the Fed buys the Treasury dept and the Treasury passing the money to state and local governments for public works projects, tanks, weapons of mass destruction, community energy programs, grain silos, etc.

That seems to be the O mans plan.


Direct spending is exactly and precisely the path that will be taken if all else fails.

Just who thinks that anyone can STOP congress and president from simply ORDERING THE SOCIAL SECURITY ADMINISTRATION to send out the checks every month? Regardless of the sale or lack thereof of more debt or the collection of taxes?And just how will the supermarkets,doctors and other businesses avoid accepting payment based on the rubber social security check my Daddy deposits in his checking account?

Have the folks who think it can't happen ever heard of the concept of legal tinder(all debts public and private she runs)?

The electrons will find thier way into the hands of the public as wages paid to employees of government vendors and goods or services provided,pension ,medicare,govt salaries,welfare subsidies of various kinds to individuals,and local and state governments.

If these are not a sufficient means of getting the electrons into circulation,I'm sure a few minutes thought I could turn up some more to satisfy the doubters.

Now let us remember that we have more to gain by inflating our currency than any other nation on earth, and maybe the best chance of pulling it off,given that our current military power means nobody can embargo US.

And just what will the people who are saving like never before do when they realize that pricesare going up much faster than interest is accumulating?They will spend as fast as they can of course,even if it is only current income getting spent other than borrowed money.

And the price of oil will keep on rising if the depletion figures I see here on the
oil Drum are not pure bullshit-these figures seem real enough to me,but I must admit that while I understand the basic geology of depletion,I'm depending on guys like West texas and Rockman to
make sure I've got my shit straight about WHEN this particular shit storm is likely to make landfall.(My opinion of the msm is not very high in most respects.)

As a professionally educated farmer with a lifetime four hour per day plus reading habit, I can say with heartfelt conviction that the price of energy input into every thing that matters to the ag business-which is just about every damn thing that exists actually but often indirectly-is going to force prices of every thing we use thru the roof-and the rest of the bau scheme uses the same inputs from fuel to lumber to copper wire to brick to cardboard to trucks and highways.

Population growth has not stopped and cannot be stopped in short order.

So regardless of the niceities of the exact definition of inflation,the fact of the matter is that electrons wll trump deflation but nobody can be sure exactly when the tide will turn toward rising prices.

Anybody looking for a good investment might do very well to consider Porge's suggestion in regard to buying a durable asset with a a large amount of embedded energy,as such assets will be extremely expensive to construct in the future.

"Just who thinks that anyone can STOP congress and president from simply ORDERING THE SOCIAL SECURITY ADMINISTRATION to send out the checks every month?" Only the whole country that has been brainwashed into thinking in economic terms set by conservatives.
I think the Social Security mechanism would be part of the mechanisms that might be used. Among the various absurdities passed around about SS is that current workers will be unwilling to pay. When these workers see that it's their parents whom they will have to support personally or see die, many will ally themselves with SS recipients.
However, I don't think the SS mechanism alone will do it. Since INMHO what we are witnessing is the inevitable crashing of Neo-Mercantilism and we've suffered plenty from Neo-Conservationism, how about a Neo-Populist Party. My start on a platform:
(1)Nationalize the monetary system, by which I mean, “a dollar is no longer a dollar unless it's recorded in a government computer.”
(2)Bring back protectionism. What's a government for it not to protect people? Mechanism suggested: You can't import anything unless you have a certificate obtained by exporting an equal dollar amount. Certificates tradable.
(3)Repudiate past treasury paper by declaring it all to be cash.

All sounds pretty ugly but some stuff along these lines could be used to “make the center hold”. Which might not be a good idea anyway. Wouldn't fit my personal approach which has been based on getting a piece of land with enough water and converting it to something that is food and energy sustainable.

When the crisis REALLY arrives you wll find that the brainwashing of the country by conservatives has damn little to do with what the current congress and president will do;and furthermore the conservatives will be on board,because a massive inflation will save thier butts as well as yours-IF it can be brought under control once well started.

If the 'publicans get Washinton back next election it will not change the calculus at all as far as inflating the currency goes as a last resort.

Remember this is very much a damned if you do and a damned if you don't scenario at the crisis point.

Logic is on your side but people in crisis often forgo logic. In the past, solutions of the kind you are talking about were implemented in times of crisis but had a basis in prior public understanding.

"Population growth has not stopped and cannot be stopped in short order."


In-migration ... what is the reason at this point ?

Why is there a need to obscure a clearly understandable topic with pseudo-terms that do nothing to clarify what is happening?

Quite simply, we are in the midst of a massive deflationary event. Destroyed wealth over the last three years runs into the multiple tens of trillions of dollars. Total inflationary actions by central banks do not even approach an initial $10 trillion.

Furthermore, even if central banks print like mad, they cannot force people to borrow.

Most commentators are ignoring the shift in the US (and elsewhere) from spending to savings. For a few years leading up to the crash, US citizens were saving a negative net amount of almost -5%! Now US citizens are saving nearly 6.9% positive. That's nearly a 12% shift in spending. To compensate for this alone requires a GDP contraction of at least a corresponding 12%. That's simply the economic side of this mess. Given that the first two quarters of this year approach an annualized 6% contraction rate, that means we need at least 6 more quarters of contraction to balance things out.

Then on top of this, we are reaching certain critical resource limits on a global scale. So the price moves that are occurring in resources have nothing at all to do with "inflation" or "deflation" except when discussed by people who have no freaking clue what those terms actually mean. What is happening in the resource markets is either (a) deliberate manipulation (and there is growing evidence of this - see this month's Rolling Stone article about Goldman Sachs) or (b) markets banging their heads against resource limits or (c) both.

I see people here at TOD argue that we should treat the terms inflation and deflation sloppily, just as the public does. Let me counter that by asking how many TOD regulars would accept an argument from someone who didn't understand the basic difference between depletion and decline? Terminology is critically important and we should not be sloppy in its use.

Finally, global leadership continues to talk in terms of "growth". This is lunacy and should tell you everything you need to know about where we are going as a species. And if it doesn't, then I suggest you visit this site and start to actually think outside the box in which you've been placed.

Somebody get up on the wrong side of the bed this morning? Apart from your complaints about my choice of terms, sounds like you essentially agree with my argument.

Don't forget the graying trend in the demographics contributing to less consumption/spending.
We are screwed as far as growth but maybe we end up with something better than the plastic fantastic foolishness that just ended.

I would agree that we are in the midst of an acute, deflationary event that has some of its first original strands starting as far back as Q2 2006, when US housing peaked and began its downward trajectory. The event started hitting in early 2007 and really broke out in spectacular fashion in 2008. However, this acute deflationary event is not, in my opinion, paradigmatic. In my view, this event is occurring within a paradigm of inflationary recession, which began in 2000. Starting in 2000, growth and earnings started declining in real terms. The decline was slow at first, and really gathered pace as the 2002-2008 period got underway.

There's no need to choose between inflation and deflation. It's better in my view to identify conditions. I like to use all perspectives, to work up my view of conditions. Austrian money supply, price levels, destruction/creation of debt, money velocity, and of course the currency.

The US currently is neither in the position that faced Japan starting in 1990, nor, the position itself faced in 1930. The essential problem is that this latest event is rolling out on top of a structural position that is not only different, but radically different from those two eras: The US lacks savings, and has lacked savings for a long time. Even an initial spike upward in the savings rate is not enough, and dwarfed by the structural position. Finally, unlike recession, the current situation is closer to a collapse--and this point is important--in collapse, our funding is neither covered by tax revenues or purchases of our debt. It is a fact that the FED is monetizing the shortfall of funding in both MBS, and Treasuries. And they've only just begun.

I don't ask that people agree with my view. Instead of browbeating others (because browbeating characterizes so much of the inflation/deflation debate) I prefer to cajole, and be friendly. For example, in January I wrote an open letter to Hugh Hendry in London in which I explained that yes we were in a deflationary event but no, it would not be wise to use government bonds as a vehicle to express that view because in a collapse there would be a drying up a trade flows, and thus the normal flow of capital would be arrested. Government bonds worldwide then went on to get hammered, even in the wake of out right monetization. As I had tried to explain to Hugh, there simply wasn't enough capital globally to cover the supply.

The United States, even before this acute phase of the crisis began, was already sucking up nearly all--if not "all" of the world's savings. This is scary. And dangerous. Japan was lucky, in fact, to have been rewarded with paradigmatic deflation. Their unemployment remained lower, their purchasing power level and at many time higher. And all the while, lucky for Japan, they were able to export into a growing world economy. Oh, and they had their savings from over 30 years of industrial growth--banked.

Textbook economic definitions are unsatisfying considering that economics has now been rightfully shown to be woefully inadequate in describing conditions. Economics strayed too far from psychology and behaviorism the last 50 years, and wound up with a bag of axioms. Just one example: I find Milton Friedman's dictums simplistic and intellectually puerile. They are deeply, trapped inside of a US centric post-war paradigm--which is now over. The hyper-rationalist phase of modern economics has now car crashed in spectacular fashion. Whodathunkit: the world is not rational, it does not make sense, and there are much fewer laws of "money" than we thought because "money" is just a tool in the hands of irrational humans (and their groups).

The greatest risk now is that the final (next?) phase of this crisis in the US ends in a panicked flurry of FED monetization as the supply of Treasury borrowings soars to bail out either States (or the institutions inside of States) as the world backs off from buying our our paper. In this nightmare scenario (which has already started imo in less dramatic fashion) each attempt to keep the free market from raising interest, via monetization, then feeds back into the spiral. The FED then loses control, and a paper currency backed by neither tax revenues, inward flows, or earnings then collapses.

As it stands, the US is already very close to debt repudiation in its flagrant debasement of the currency, and the hyper issuance of new Treasury supply. Regardless of how this plays out, I maintain my view that it began essentially in 2000, not 2008, which ushered in this volatile oscillation of deflation begetting inflationary-policy, thus begetting more deflation. And so on.


PS: My letter to Hendry (see also Reuters coverage of our exchange ), who I like alot, and who remains very devoted to his deflation case, was received well by him and he's done me that favor of now providing me with his own monthly research/letter in exchange.

Well said.
This entire mess started in 1971 when Nixon blew off gold and then really got into high gear with the actor president"s "If we build it they will come" supply side nonsense. Top it all off with deficits don't matter and two back to back swindle bubbles shake well and voila you have a morally, financially and intellectually bankrupt Nation.

We hear again and again about what Nixon did with respect to gold as if he could have done anything else. The Vietnamese war was the first war we fought without being willing to pay for it. That broke the role of gold. Now we are winding down a 2nd such war (Irag) and building up a third in Afghanistan/Pakistan.
One thing American's don't want to look at is the role that military spending has played and is playing in this mess. While at the same time they remain true to the basic religious obsession of our society: the way to handle problems is to kill people.

Good point and I agree.

I don't ask that people agree with my view.

I Agree!

Instead of browbeating others (because browbeating characterizes so much of the inflation/deflation debate)

Probably because inflation and deflation exist simultaneously and are usually in a state of tense equilibrium. Both the inflationists and deflationists are right!

I prefer to cajole, and be friendly. For example, in January I wrote an open letter to Hugh Hendry in London in which I explained that yes we were in a deflationary event but no, it would not be wise to use government bonds as a vehicle to express that view ...

For a whole raft of reasons, most of which orbit around the government debt is manipulated by issuers and primary dealers.

... because in a collapse there would be a drying up a trade flows, and thus the normal flow of capital would be arrested.

Which is exactly what is happening now! Which means the 'collapse' is taking place behind the scenes. It also puts the lie to the Smoot- Hawley myth of interrupted international capital flows. Capital (gold) was flowing all right, not overseas but into tin cans in people's back yards and into safe deposit boxes.

Government bonds worldwide then went on to get hammered, even in the wake of out right monetization.

Because the markets are bigger than the central banks, and because at some point traders stop pricing inflation and start pricing default ... a Minsky Moment.

As I had tried to explain to Hugh, there simply wasn't enough capital globally to cover the supply.

I see his point, however. None of this is going to happen tomorrow. The central banks can create a crisis anytime they need one by pushing one of their many zombies off the edge of a cliff.

Dresdner Kleinwort drops primary dealer status

Fri Jun 26, 2009 2:16pm EDT

By Kristina Cooke

NEW YORK, June 26 (Reuters) - Dresdner Kleinwort Securities has withdrawn its name from the list of primary dealers of U.S. Treasury securities, the New York Federal Reserve said on Friday, as new parent Commerzbank scales back its U.S. operations.

The change, effective after the close of business on Friday, brings the number of dealers back down to 16 after Jefferies & Co (JEF.N) was added last week. Sixteen dealers is the smallest number in the network's 49-year history at a time huge government debt issuance is looming.

Primary dealers do business directly with the Fed and are required to bid at Treasury auctions. The Fed also regularly consults with them as it gathers market intelligence.

Kleinwort Benson Government Securities first became a primary dealer in 1980. It dropped from the Fed's list in 1989, but became a dealer again in 1997 after merging with Dresdner.

Commerzbank AG [CBKG.DE] took over Dresdner Bank earlier this year and has moved quickly to scale back its loss-making investment-banking unit and is focusing on its European operations.

"Retaining our US primary dealership does not fit in with the strategy of the new Commerzbank, which is to be a leading player and provider of liquidity in the European bond market going forward," said Marypat Davis, a spokeswoman for Dresdner Kleinwort in New York in an email. She added that a sales force would be kept in the United States to support that strategy.

Rumor has it that Dresdner couldn't make its spreads and was sitting on billions of unsold Treasuries. PD's HAVE to buy the stuff if nobody else will. Yes, makes your point but there are other banks out there ... and the outcome of a PD failure would be a flight to quality and a drop in yields ... I would look at DK ominously but also cynically.

Textbook economic definitions are unsatisfying considering that economics has now been rightfully shown to be woefully inadequate in describing conditions. Economics strayed too far from psychology and behaviorism the last 50 years, and wound up with a bag of axioms.

Absolutely right on the money; the most honest description of economics I have seen on the internet!

You left out the crooks and scoundrels part, btw; one of the most blatant shortcomings of establishment economics is the assumption that all participants are fundamentally honest when the most glancing observation allows honesty to be the exception.

The greatest risk now is that the final (next?) phase of this crisis in the US ends in a panicked flurry of FED monetization as the supply of Treasury borrowings soars to bail out either States (or the institutions inside of States) as the world backs off from buying our our paper. In this nightmare scenario (which has already started imo in less dramatic fashion) each attempt to keep the free market from raising interest, via monetization, then feeds back into the spiral.

Or there is a run against the dollar ... in any event the Federal government cannot raise cash to finance day-to-day operations and business cannot raise (presumably foreign) currency to buy oil. This would be followed by a general liquidity crisis (already happening) where one currency then the next is seen to be a proxy for the dollar with massive printing and default(s) in turn.

There is also big problems in China:

January’s CPI Suggests Inflation Surge
02-19 11:44 Caijing Magazine

Fanning fears of inflation in China, the consumer price index (CPI) has soared to a record rate in more than a decade.

By staff reporter Zhang Huanyu and intern researchers Onejin Wu and Zhang Hong

According to figures released by the National Bureau of Statistics (NBS) today, China’s CPI rose 7.1 percent year on year in January 2008, the largest increase since December 1996.

The drastic change in the price of consumer goods was mainly driven by the 18.2 percent increase in food prices, which accounts for one-third of China’s consumer basket. Pork prices, which seriously affect Chinese households, led the food category with a 58.8 percent increase over the previous year. The price of other important commodities such as cooking oil and grain were also up by 37.1 percent and 5.3 percent respectively.

I'm betting on hyperinflation in China starting ... soon? I believe all this yuan under- valued/current account assumptions to be backward. There is more ... here:


I don't ask that anyone agree with my view, either ....


Steve--The inflation in China could be just the oilprice spike working it way through. In which case no particular reason to diagnose impending hyperinflation.

Well you know, Robin, this is something that is happening, the oil price are having an effect there as everywhere else. That would mean there is more a deflationary effect on the economy as a whole.

One of the reasons I think there will be hyperinflation in China is becase so many people are looking for it to happen in the US. It is too easy for the US to export its inflation to China, its been doing it for years.

Another reason to think not just of inflation but hyperinflation is that a) the Chinese government is obsessed with the value of their dollar- denominated holdings, b) stimulating the economy by either direct lending and forced bank lending and c) China being a closed society with a lot of currency savings at the individual level, the citizenry is vulnerable to rumors.

a) Large foreign exchange surpluses (along with little to invest them in) means a lot of reserves to leverage local currency (Yuan - also called Renmimbi or RMB) against. Apparently the Chinese have printed a lot of yuan. They desire for the yuan to be an international reserve currency so they are printing even more. Trying to stimulate their economy like the US is doing means they are printing even more. How much more? Nobody knows and that is a real problem!

b) The Peoples Bank of China is lending directly to state- sponsored business (the Chinese military is a large business owner, particularly of heavy manufacturing enterprises) and the latest stimulus plan has required private banks to make as many loans as possible in order to provide required liquidity. Unlike in America where the Fed ASKS the banks to lend and they turn around and ignore the Fed, the Chinese banks actually lend money.

c) Inflation requires fuel - it is a way for governments to steal from citizens by substituting increasingly worthless currency for goods and services which presumably have a more certain value. Something of value is needed close at hand to steal and that in China is the savings of its people. Since China is a closed society with a cynical government and no free press to speak of it is possible to stampede citizens into turning out their savings all at one time. This could be done by a rumor that the government will confiscate savings or will devalue the yuan or even more complete lie, such as 'China will become a dollar economy so all citizens should spend their yuan'.

China becoming a dollar economy would actually be am extremely smart move. The Chinese treasury has more dollar- denominated reserves than we do! It would be a lot smarter than their attempts to puff up IMF Special Drawing Rights (SDR's) into a currency.

Right now, inflation is a problem in China. Unlike America, there are few assets in China to hedge against inflation, it is rare for people to be indebted - inflation benefits debtors - and there is no currency 'flight'. Chinese cannot invest individually in dollars, Krona, Euros - but can in Hong Kong dollars. Chinese invest in gold, but the government could follow FDR and confiscate it. This was simple robbery in 1934 but would be sharply inflationary in China.

Even with noise to the contrary, the Chinese are still buying Treasuries. I believe it was Simon Johnson who pointed out the Chinese government would double their holding of treasuries in a few years. I don't agree, but this mechanism at the much lower current rate of purchase could easily allow the export of US's expected inflation to China, as the rise in oil prices allowed the US to export inflation to the Middle East.

Printing, 'de- saving' and no alternate investment could kindle increased velocity - repeating transactions with the same currency - and that would be the beginning of hyperinflation. Beijing would think the money supply is too small. It would also believe its currency to be undervalued! Both of these would accelerate the conflagration. Millions of Chinese savers would lose their savings, this value would flow to the government and the PBOC, which is always the reason authorities to do little to stop it.

It also gives reason for governments to encourage it.

There are few good sources of information about what goes in in the PRC.


Steve--I guess that either I'm muddled or you are. If I understand correctly, inflation is not something that happens to a country, but something that happens to a currency. So if China adopts the dollar as its principal currency then it will be armlocked to whatever inflation/deflation takes place in the US.

What do you mean by America exporting its inflation to China? Do you mean the Chinese buying US treasury bonds? In that case it would I guess be an increase of the dollar money supply, threatening inflation for both nations.

Interesting theory about a more powerful rumour system in the PR of C. But I am sceptical. They have very controlled media for a reason. In such a society, people will be afraid to say what they think or have heard, for fear of blackening themselves as a traitor to the community. So they won't spread rumours. And if they hear a rumour they will be more likely to dismiss it (as conflicting with what the media is telling them). The Orientals are high-IQ but high-conformity too. Tainenmen etc. China is a huge country with limited communications. So I expect the rumour factor would be lower rather than higher. And the illiberaller govt would have more power to constrain deposit-removers anyway.

It seems to me that oil has taken over the role of gold as the "backer" of the fiat currency. The US has gone in and essentially confiscated Iraq's reserves, which are huge, and that is the reason the dollar hasn't already tanked............that and the fact that the US can do whatever they want because of military superiority and no one will stop them.
I know that someone is going to jump in and say that oil gets used up but gold doesn't so it is not a fair analogy but oil is the master resource that all other wealth is created from either directly or indirectly.
Don't you think that Darth Cheney knows exactly what the value of Iraq is strategically? Everyone will say that the government is a bunch of incompetent fools but when it comes to stuff that counts they know exactly what they are doing.

The US has gone in and essentially confiscated Iraq's reserves, [..(my chop)..] ...........that and the fact that the US can do whatever they want because of military superiority and no one will stop them.

I didn't ever believe that stuff about parallel universes. Until now, on reading your comments above, which clearly prove the existence of such a parallel universe.

Do you think that the US military would be in Iraq if they had no oil?
Oh that's right, I forgot it is to spread democracy. right.

I didn't say they didn't go there to grab the oil. What's debatable is whether they are going to end up in control of it. They are about to leave in retreat from an apparently lost war. And as for US can do whatever they want due to military superiority, better tell that to Gruzya (Georgia), Russia, Iran, etc who apparently haven't been informed yet.

You don't think that the US is really leaving Iraq do you???
It is a news media propaganda stunt.
That oil that is in the ground in Iraq is the last prize.
The troops are merely being repositioned in less obvious ways but they are going to be present and available to control the oil.
The news is not information, indeed, it is disinformation. Who controls the news media??
The ruse of allowing other countries to bid openly for the reserves is a smoke screen to make it look like the reasons for invasion where not to grab the oil.
Time will prove my opinion on this matter to be more correct than not and that the "withdrawal" is anything but.

There's little or no actual savings. The savings rate increase is attributable entirely to paying down debt.

Destroyed wealth over the last three years runs into the multiple tens of trillions of dollars. Total inflationary actions by central banks do not even approach an initial $10 trillion.

Wealth is not numbers on a screen. Nothing was destroyed other than illusions...................

Now if you have something real like gold or land or a home and it's not encumbered by debt then you lost nothing, did you?

Bingo.... all that happened was that phony numbers got changed. The same stuff is still in existence. That is why money is inherently flawed. Gold is much better because it takes effort to dig it up and process it but it is itself still just a proxy. It would be better if we could establish a currency that actually had intrinsic value of utility. Energy based money might work if it could be accounted for some how but the US would never ever go that route because then the Arabs would be the world bank.

Personally I understand very well what the TECHNICAL DEFINITIONS of inflation and deflation mean,BUT these meanings are not consistent with the EVERY DAY meaning of the terms as used by about 99.9 percent of the people in the good 'ole USA.

I will continue to use the every day definition as a matter of convenience in my comments because unless one happens to be a professional economist or maybe a CPA,etc,when gasoline goes from 2bucks to 4 bucks,THAT'S INFLATION-to the principal of the local high school ,to the lawyers playing golf,to YOUR WIFE most likely when she fills up the family car.

But it would be good to have clearly delineated language as it does indeed lead to more intelligent discourse.

Actually both causes of rising prices -technical inflation resulting overexpansion of the money supply in relation to the amount of goods and services available for sale- and rising prices resultingfrom scarcity/ rising costs will pulling in tandem harness cause nominal prices to rise .It's been a long time since I studied this subject and I may not be dead on in my terminology.

The important end result that I am trying to emphasize is that any dollar denominated paper will inevitably depreciate over the long run,although cash may indeed remain king for a while yet.

There may not be a runaway inflation,and there won't be if the guys sailing the finncial ship are steady and true and we don't run into too much more stormy weather.But thse same financial sailors would be very happy to get away with wiping out a big portion of the dollar holdins of the Chinese and the oil exporting countries by paying off in funny money.

But if the going gets rough,and the policy of the day and the year is inflation,history indicates that tptb will floor the pedal and try to bull thier way thru.

Logic will have very little to do with this response.Once into a crisis of this sort,it's either all or nothing-you may still emerge more or less whole if you successfully forge ahead but if you stop you are "dead in the water" .

Great post Chris Nelder! I've been certain for some time now that the price of oil is the leading factor in the health of the economy, and as much as many people think the price can go into the stratosphere, fact is it's already too high. Historically recessions have recovered with oil between 5-15 dollars a barrel. Now its around 70 and what we see is this idea you have proposed, with the help of others, the inflection point:

"It now seems possible that we have reached an inflection point in economic history, where the price at which energy is high enough to sustain new production is the same price at which things become too expensive, leaving us no option but to downsize."

I've been waiting for a chart like that for some time now, that analyses that dynamic. Essentially it waters down to cheap oil, which is cheap energy, supported the building of our world civilization, and now expensive oil will cause recessionary pressure on the way back down.

The hard part is it's happening in slow motion. Its not like pulling a bandaid off real quick, but rather like sinking in quicksand very slowly. You know its happening, but there is no life line (cheap oil) to save your financial butt, so you keep sinking along with everyone else. 2012 will be completely outrageous, although I'm sure there will still be people saying, "What's peak oil?"

Interesting read from the doomers.

I don't buy the U-shaped 10 year scenario entirely.

Investing in hard commodities, especially oil will provide immense returns over the coming years.

Most here should realize that, for obvious reasons.

My take: you will have one more chance to make significant gains in energy stocks before peak begins its final erosion of the growth economy. Invest, take your gains, and convert cash into assets that protect against inflation. Timeline for gains: now to 2015, cash out, convert, then go into your community and help the transition from a position of security.

Just my my humble take.


Generally agree, but I also see a decades-long bull market in renewable energy and efficiency. I don't think everything just falls off a cliff after peak fossil fuels. How it all tumbles out though is still a very interesting question.

The EROEI or net energy production curve is a "shark fin," which indeed has a cliff. There is likely to be a shortfall of discretionary energy to power such late conversions because the production peak is closely associated with the "cliff" of the shark fin net energy production curve.

Think about it this way if we where on a symmetrical bell shaped curve before 2000 i.e before we had strong price increases then it makes sense that technology could be used to distort the curve giving at least flat to rising production for some time. At worst a very slow production decline.

Thus if we are not on a shark fin production curve then the argument can be made that we could put ourselves on one making the consequences of peak oil worse eventually be certainly not a near term event.

This suggests that we would only experience higher prices for a short time once economic activity rebounds very close to what it was before the economy collapsed. You have a bit of slack but many project started because of high prices are going to finish and of course demand is down substantially slowing the depletion rate.

Thus suggests that oil prices will remain low for some time. I find it hard to believe 70 is now the low price for oil 40-50 makes far more sense stretching it 60 but regardless at some price point that readily acceptable for the current economic conditions we will see prices stabilize and flatten probably for years.

However :)

If we are already on a shark fin curve i.e we have already done what I just said then this is it production will crash and no way the economy can crash fast enough to prevent brutally high oil prices and a strangling of excess.
Asset deflation is not really asset deflation but devaluing of any good and service bought via credit which is a promise of future payment. Its not that assets are losing value its simply they are only worth what people can pay for today with cash. For formerly big ticket items such as homes and cars this number is effectively zero.

However items critically needed for survival such as food and energy are immune from this vicious cycle i.e regardless of what happens in the credit markets and even with the money supply to a large extent we will see the value of food and energy represented as prices increase dramatically. Given we won't deflate our money supply or we crash and we probably will at least continue to inflate the reserves of the banking system we can expect real and serious price increases.

This goes until effectively all debt has been removed from the system and even though we have a fiat currency it does no good since we are left with a traditional cash economy with the bulk of the money used to buy food and energy and other critical goods.

One reason fiat currencies where not used extensively in the past is they simply don't work in a regime of no economic growth or contraction. Having one at this point is really just and anachronism and we just as well switch back to a gold based currency. We don't have to but it worked before for many reasons and it will work again. Attempts to continue to expand a fiat currency at this point will simply force them into a hyperinflation crash. Given that the value of many assets where already effectively zero hyperinflation at this point is just a sort of death twitch for the fiat currencies. I'd suspect the real economy will move rapidly to gold or barter or any fiat currency that remains stable.

Its important to understand that no economic growth is really needed and that the economy itself barring nuclear war cannot simply shrink fast enough i.e we can't give up on food and we can't give up on our basic energy use fast enough to prevent a crash. And if oil production is really crashing then your talking about production declines in the range of 500kbd - 1mbd. Take into account export land and its fairly obvious that high energy prices will drive the shrinkage of the economy to make supply meet demand. By the time the economy shrinks to match the current supply level it would have already dropped enough to rise prices and cause further shrinkage.

You might get brief periods where supply exceeds demand but these are doubtful.

The credit contraction is not entirely based in the real economy. The most apparent pure economic cause is essentially rampant wealth condensation rendering the lower classes effectively insolvent. Where the lack of actual income depressed effective demand, credit was extended to make up for the shortfall. However, future wages as something of an annuity to be collected are easily exhaustible, and the credit crisis is in very large part that saturation. As I mentioned elsewhere, the increase in the US savings rate is not in actual savings but in repayment of debt. An obvious conclusion is that that repayment does nothing to address the lack of effective demand, since it's just the creditors' claims on all future wages being incrementally fulfilled. The remainder of future wages are still already claimed.

There is a serious component of net energy decline in the real economy, but the credit affairs need more direct explanations to show their involvement in it.

I agree with what your saying but I'd argue that this holds up to basically now.

Effectively consolidation of wealth has lead to lower real wages and credit was extended to cover this fact.
Pretty much the same as the company store in a company town. The workers pay inflated prices using company credit at the company store until not only are all of their real wages claimed but they are hopelessly in debt.

For Americans the shiny baubles of houses and cars on ever more lenient credit terms along with credit cards represent the company store. As long as inflation held the default rate was fairly low.

I don't think its a coincidence that the credit and the real energy economy peaked at the same time however rising energy prices played a secondary role in helping slow then finally burst the credit bubble.

This is in my opinion important because many people claim that a price higher then X is impossible for oil where X is no in the 100-150 range whats funny is if you read these same claim where made when oil hit 30,40,50... etc.

What really happened in 2008 is fairly simple higher oil prices helped lower the consumers cash flow and thus their ability to pay enormous debts so the taking of new debt slowed and eventually started defaulting.

Sorry to repeat myself but energy was not driving the situation its exactly like you point out. Now falling EROEI was probably one of the drivers for expanding the credit bubble in the first play as the ability to create real wealth slowed but again the interaction between the expanding credit bubble and falling EROEI is complex.
I'd say that as EROEI decline that in general credit is increased to drive expansion. But we certainly have other forces such as export land multiple currencies globalization etc at play.

But I'd argue that all of this does not matter now except for concentration of wealth which is relentless.

Now energy instead of being a secondary force becomes the driver of economic collapse this means energy prices will rise until the force economic contraction and as a side effect force outstanding debt into default as it can no longer be repaid.

At the moment we are transitioning from a traditional recession from credit contraction into a energy driven depression from declining resources. This is not something we have seen in hundreds of years perhaps even one thousand years on a large scale. I'd argue that declining resources from metal's to wood played a role in the collapse of the Roman Empire. After this the America was discovered then the first wave of globalization and eventually new energy sources like coal served to either paper over the economic effects of depletion via expanded trade networks or replace dwindling resources. In fact we have had several waves of globalization each one serving to hide or if you will balance resource issues.

Again this does not matter since we are no longer in this sort of economic system but a new one driven by declining resources. And last but not least I'd argue that if this is correct and we are entering an energy driven depression then the price or cost of energy will be much higher then has been seen in the past.

150 dollars a barrel was a pinprick on and insane credit bubble now the price of oil will rise until its a sledge hammer to the economy. My own estimate is into the 500-800 a barrel range.

"You load sixteen tons and what do you get
Another day older and deeper in debt
St Peter don't you call me cause I can't go
I owe my soul to the company store."

"This goes until effectively all debt has been removed from the system and even though we have a fiat currency it does no good since we are left with a traditional cash economy with the bulk of the money used to buy food and energy and other critical goods."

Since energy and food as essentials will not experience demand destruction and increase in value it is reasonable to conclude that investments in low energy input agriculture would be profitable. Grazing cattle on grass lands, organic manure based agriculture, OX and water buffalo driven plows. Expect further exploitation of human based agricultural labor. In the most desperate extension of contraction instead of illegal immigrants picking broccoli and beans think cooperatives of large labor camps made up of the desinfanchised unemployed. Modern serfdom.

Maybe certainly demand for food is related to the population. Demand for energy is also but its more population*lifestyle. So energy demand will decline as lifestyles change. I see no reason for lifestyles to change faster than forced by rising energy prices. But regardless in general it makes sense that we will revisit older lower energy lifestyles. The future won't repeat the past for example you mention organic agriculture its not clear at what price point organic agriculture will be competitive with industrial agriculture esp if you look at using soybean oil for farm diesel needs. Also since food is required farmers can pass on higher fuel costs.

Probably before agriculture itself changes significantly we will remove the significant amount of processed foods that are part of the diet. I suspect we will still have industrial agriculture for a surprisingly long time however people will buy in bulk and prepare more food at home from raw ingredients. A move away from processed foods to bulk makes sense. Eventually your right at some point esp after several years of high unemployment we probably will see labor intensive organic agriculture become important as it becomes cost effective.

For our financial system and lifestyles I think that the move away from debt is going to have the largest effect for a while rising food and energy prices probably can be handled for some time and to surprisingly high levels as debt is taken out of the system its really only after the financial system is cleaned of debt that you hit the point where fundamental shifts such as changing agricultural patters begin to make sense.

We are already seeing most of the pain in the debt markets primarly housing however even with whats happened most areas are still well above historical norm for home prices. With what I'm saying they will drop well below historical as food and energy rise to take 50% of your wages. And wages probably also fall. Only after we get through this debt removal phase will we finally see people actually change as older lifestyles offer a better standard of living vs trying to maintain a high energy lifestyle.

Bottom line people are not going back to the farm and moving to riding bicycles till they have no better choice.
This suggest it won't happen until the social safety net is removed or crumbles.

Its a bit strange I think energy and food prices can go far higher than most people believe but I also think that even with this real change will be resisted to the bitter end. Only once people simply give up on the middle class dream will they finally try and create a better low energy lifestyle.

"This suggest it won't happen until the social safety net is removed or crumbles."
What is this "social safety net" you talk about? Please look at the actual facts in this regard. What about political effects of unemployment? It seems to me that one of the things that is happening is the end of neo-mercantilism. Without this, how can oil prices go that high in the US if we have nothing to export in trade?

Since energy and food as essentials will not experience demand destruction

Not so. Just because poor people still want as much food and energy does not mean they can afford the prices to articulate their wants into undestructed demand. Especially after they've starved and frozen to death.

and increase in value it is reasonable to conclude that investments in low energy input agriculture would be profitable.

A wise investment in one's own food security, but not profitable to provide for a shrinking market of others, increasingly unable to pay enough.

Gold gold gold

- oil is potential value, gold is stored value
- oil drives inflation, inflation drives gold

here is the analogy: if you are old enough to remember this - in the late eighties/ early nineties when i was a young whippersnapper I attended events from Microsoft, and Cisco, and Intel. They all claimed to be part of a new paradigm.
I did not understand what they meant.
I did not see what was emerging.
There was a new way of working.

I suggest that gold today is where Microsoft was in 1990

If you disagree, perhaps take time to question your mental framework - your inner model

I said this "oil drives inflation, inflation drives gold" line to a friend of mine in 2005 and he laughed outright. He was pretty dismissive "how much do you have in that idea?"

Oil drives inflation. There's a lag time, but it's correct.

First point. It's important to be clear about [what] inflation is. Rising or declining prices are not in themselves inflation or deflation. Computers have dropped for years. This is not deflation. It's because the cost of building them dropped. Energy is, aside from big swings, going up. That's not inflation, it's costs going up. Inflation is prices going up because of an over supply of money: Weimar Republic classic example.

Two things are happening: oil will continue going up, with wild swings almost certainly, and all else that depends on oil will therefore also. That's not inflation.

These rising prices are causing a massive asset devalaution, a massive devaluation of our entire infrastrucure which is built on the premise of cheap energy. This massive devaluation is causing financial havoc, and the government is printing (or is committed to printing) massive amounts of money. Astronomical debts and obligations have accumulated that can never, ever be paid [back], because the physical resources are no longer there to collateralize them, to sustain the growth that could float them away. They must in one way or another be dealt with. Repudiation and default is one method. The other is inflation, the printing press. Both will be used.

I do not for a moment believe that from now on the economy will continue declining forever at such a speed that is always ahead of the decline in the production of oil. If the gov't has to directly spend the money itself (on war for example) it will do so. To believe otherwise is to say that the economy is in its final nose-dive. Even I don't believe things will be that simple.

Deflation would result in increasing the debts and obligations of the gov't to a whole host of groups, pensioners etc. Never happen. One way or another, inflation will come roaring back. [It will vastly exceed that resulting only from energy induced increases because of the need to repudiate the mountain debts and obligations.]

My biggest beef, however, is that we worry about all this exclusively as investors. As investors, we are all going to be destroyed, some sooner, some later. We'd better start thinking beyond our investments and about what kind of societal restructuring is necessary to allow EVERYONE to survive. Until we start thinking that way, there is no hope. Millions upon millions of people are being thrown on the scrap heap, they will never get those jobs back. How can they live? It requires a whole new direction, whose end point is a return to the soil and all that entails (localization, etc).

[edits subsequent to initial post]

"We'd better start thinking beyond our investments and about what kind of societal restructuring is necessary to allow EVERYONE to survive. Until we start thinking that way, there is no hope. Millions upon millions of people are being thrown on the scrap heap, they will never get those jobs back. How can they live? It requires a whole new direction, whose end point is a return to the soil and all that entails (localization, etc)."

Right on!

Thankyou for saying it.

what kind of societal restructuring is necessary to allow EVERYONE to survive.

Huge fleets of flying pigs which would dwarf the airforces deployed in ww2, and still not be enough. Everyone going to survive is not an option, rather it's an impossibility in my view.

"The thing about gold is you can't put enough butter on it to make it taste good and it doesn't burn very well."

Gold will become worthless if society collapses. However, paper money will die first.

All money will die. Barter won't.

I generally agree with the analysis here (Chris and Steve espec). I was hoping to find on this page a clearer picture of whether there is likely to be a hyperinflation crisis anytime in the next few years. If I've understood the above correctly (as not an economics-wizard), the expectation is that general hyperinflation is going to be held in check by the strong contractionary forces of deflation. Is that correct?

One thing that bothers me is the notion one commenter expressed about the "proper" meanings of inflation and deflation. As far as I can determine half the problem is that there IS no proper meaning or definition of these terms. Individual things have their ups and downs of price. But what thing is important to one person is not important to another. Prices of luxury cars or houses don't figure in my budget (or of millions of other poor people). Meanwhile, prices of food, clothing and heating of houses are important to me but trivial to the richest 2%. People can assert that this or that measure of in/de/flation is what really matters but at the end of the day it appears to be mere opinion.

I do think George Mobius's term "contractflation" is the most apt to describe our present situation.

The paradigm of our new, post- peak age is simple and easy to remember. Perhaps it should be put on the masthead of The Oil Drum:

The outcome that is most destructive to the greatest number is the most likely.

In America, Eurozone, Japan, deflation is most destructive because these countries' citizens hold a lot of high value (relative) assets and rely on credit rather than cash.

In China, India, Brazil, Russia and energy states, inflation is the most destructive because individuals hold few private assets and citizens rely on cash and savings rather than credit.

More destructive would be thorough deflation in the US (taking people out of assets and into cash) followed by hyperinflation (destroying the value of that cash). This sequence is therefore the most likely.

Destructive as well would be nuclear war ... which is certainly not out of the question. Also destructive would be warming induced drought. Also destructive would be ... well, you get the idea.

In fact, we’re seeing inflation (of prices) and deflation (of assets) simultaneously.

Sorry, Chris, but this is a nonsensical sentence. Westexas somewhere above says something similar.

Speculation simply cannot cause inflation, though your definitions leave that possibility wide open. If the baker in your town dies and there are fewer cookies for sale, their prices will likely rise, but you wouldn't call that cookie inflation, even if it's the same as what you talk about.

Inflation is not the same as rising prices. The fact that it has become de rigueur to be confused about that and/or think that it does still doesn't make it so. By using inflation in a different meaning than it has, the confusion only increases. The cookie example makes sufficiently clear that terms like price inflation, consumer inflation and what not are void of meaning.

What people mean to say is that certain prices go up. But they imply at the same moment that others don't, or the distinction need not be made. The term "Indeflation" shows only where all the confusion leads to: less meaning. You can call a cow a table, but it's still a cow, plain for everyone to see.

• Inflation is an increase in available money and credit relative to available good and services, combined with an increased velocity in money.

• Deflation is the opposite.

• Everything else is neither.

Since far more credit lost on derivatives wagers needs to be paid off than any government can even dream of printing, inflation is impossible. That doesn't mean that prices for oil, or homes, or cookies, or any other subsection of the economy, can't go up temporarily. They're simply unrelated events.

Well I don't think its all that simple.

First and foremost most modern economic transactions are done with debt instruments of some sort.
The amount of cash transactions are trivial compared to the size of transactions made with debt.

I'd argue that classical definition of expansion and contraction of the money supply to describe inflation or deflation are simply antiquated.

What matters is the amount of debt and the value of the assets backing that debt and the default rate and availability of credit. This is why economist are generally focused on price inflation and primarily on goods and services purchased with debt. The only thing that really matters is that the underlying asset values vs the debt agianst these assets remain close. In some cases like auto's although the asset depreciates generally the debt vs asset value is fairly close and its a debt on a needed item thus generally the last one to be defaulted.
My point is although there are exceptions in general its critical that asset prices slowly rise such that your better off borrowing money and buying now vs saving and buying later. This is true even of autos where generally auto prices have risen steadily over the years. Obviously homes have seen real price inflation. And last but not least the ready availability of debt or leverage tends to work as a self fulling prophecy causing prices to rise as demand remains high.

Nowhere in this was the availability of cash part of the equation. Certainly banks have some notational restrictions on the amounts they can lend but with securitization of loans this is effectively infinite.
As a side effect of the selling of loans banks no longer need anything more than token deposits.
One has to wonder if FDIC protection limits have not played a role in banks seeking ways around capitalization requirements. Certainly as the credit economy grew the amount of cash kept in banks was reduced to that needed to pay debts. Regardless this debt economy is not constrained by the money supply its not clear to me that the Fed has any real control over this debt economy outside of setting interest rates which can to a degree influence the eventually expansion and contraction of total credit availability.

This is why the Feds injection of liquidity into the banking system will probably have no effect. The problem in the banking system is far more serious and its that debts can no longer be serviced. And thus eventually extending credit no longer works as default pile up and asset values fall.

Resource constraints are not even part of the equation ready availability of credit extends throughout the economy this if a resource gets constrained prices increase marginally and the industry is given credit to expand its fairly well balanced. Of course sometimes it stumbles and we have recessions.

Now obviously the industrial capacity of such and economy is far greater than one based on cash and savings its effectively producing the goods a cash based society wold require in ten years or more in one year.

Now what happens when this monetary ponzi scheme contracts is that injections of cash simply don't do any good the debt dwarfs any amount of cash that can be printed without collapsing the fiat currency. All injections of cash do is really cause more money to circulate around at the peak of the financial pyramid. This cash is used to speculate on highly liquid assets or effectively cash equivalents. Speculators who can rapidly flip assets become the only viable debtor. And certainly some of these are going to get burned badly. The hope is that these speculators can create another bubble somewhere in the economy.

I like to call this rich mans inflation poor mans deflation as liquidity injections simply don't trickle down but are used to create even more leverage in attempts to recapitalize. The benefit of course is that this money tends to go into speculation across all markets giving the semblance of a healthy financial system. Of course at some point several players will lose big and it will shake the markets all over again.

And yes to some extent this certainly includes oil but in general the connection between the price of oil and speculation can be seen by it being inverse to the strength of the dollar. As liquidity flows into high finance and the dollar weakens vs other currencies oil tends to rise.

However this is the old stuff and even this debt economy and debt deflation has been superseded by a new phenomena thats not been seen in hundreds of years. Resource constraints. Primarily oil but as the economy gets weaker other resources will become difficult to sustain as suppliers go bankrupt. Mining for example will falter.

So you have massive over capacity and rising resource costs this is a recipe not for depression but the collapse of the civilization itself.

The overcapacity puts tremendous downward pressure on prices.
Work force reductions downsizing and bankruptcies reduce the total consumption.

However rising commodity prices are moving in the opposite direction forcing companies to pass on production costs. Primarily oil but like I said other raw resources will rise in price also.

For companies in debt this is the death knell overtime they simply can't cut prices vs a competitor with less debt so they will go bankrupt. The competitor will get a larger market share allowing him to maintain prices for at least a while. Later on this same competitor will be able to take on more debt to try and survive until he too is forced out. As more companies go bankrupt borrowing will become effectively a form of suicide simply delaying the end.

However whats important is that debt now acts in a negative fashion in a resource constrained world businesses that should have exited and shut down remain in operation for way too long continuing to pay employees and keeping their consumption high and continuing in their own energy usage. Thus debt now acts in a paradoxical fashion ensuring that energy demand continues to remain much higher than it should be and thus ensuring rising energy prices. This vicious cycle only stops when debt is aggressively withdrawn killing everyone but the strongest companies and causing a sharp drop in employment and thus driving down energy prices.

In a sense we effectively either inadvertently or on purpose just did this, briefly in the second half of 2008 however this dramatically weakens the financial system thus trying it again is probably impossible. Think about it if we got hit again by a similar set financial freeze up as happened in 2008 the system would just collapse.

Thus we are not going to make the hard choice instead credit will be extended even to unworthy debtors and it looks like the government will work to underwrite the losses. All this does is steadily weaken the entire economy as energy prices are driven ever higher.

There is simply nothing we can really do about it thats not extremely painful. Realistically only a third world like economy is viable in a high energy price routine and collapsing towards it on purpose is not viewed as viable.

In effect we are now in a global resource war every country is desperately trying to maintain industrial capacity and keep unemployment low driving up energy usage and thus driving up energy prices. This is a fight to the death it ends when a countries government and economy collapses. Its and economic war to force the total collapse of your competitors. Right now fighting is fairly limited in this war primarily in Iraq and Afghanistan and as always Africa. But South America is heating up. And of course hot resource wars are even worse as waging war is a resource and esp energy intensive business further inflaming demand for oil and food.

Obviously at some point attempts to backstop the American consumer and say support housing prices will stop I suspect that the liquidity injections will work their magic and create some winners in the financial system.
Its ironic that the only place the US is being financially smart is in creating a small number of well capitalized banks that are rapidly dumping bad assets such that they actually have real valid robust books.
I'm sure some of these are very aware of the resources issues and in no small part profiting from the situation.

In any case on the financial front we should move to phase two. Especially if oil price rise rapidly.
What this will be is a consolidation of the banking industry with the too big to fail banks broken up and scrapped to create a smaller number of real financial powerhouses which are co-owners of the US.
At this point the US consumer is a detriment and will be thrown under the bus so to speak. Support for housing prices will cease and they will be allowed to fall in order to support purchasing of other items.
The reason is simply since new housing construction is dead housing no longer works to drive the economy. The buying and selling of used houses at high default rates is not important.

I think that the support for the auto manufactures was more devious then most people realize I suspect the real reason was to maintain industrial capacity for supporting war it has little to do with keeping people at work.

Same of course with universal health care the only reason for it is to reverse the decades of globalization and ensure American goods are competitive with other manufactures.

Both are moves to fight the two front economic/hot war over resources.

Consumerism itself will probably become ever less important as we move to a war footing with manufacturing and raw materials being sent into the military industrial complex.

However I really think that no matter what we do resource constrains will hobble the military effort i.e we still have to work with and ever dwindling energy supply so even with the new military footing I don't see things getting better. We simply don't have the resources to fight a war on a scale sufficient to result in full employment. I'd have to guess that troop numbers will be increased and commanders will become increasingly willing to take high casualties to achieve objectives.

One has to imagine given recent events that destabilization in one of the oil producing regions Africa or the ME or South America will cause significant reduction in the oil supply further inflaming the situation.

Thus the new world we are entering bears a striking resemblance to the old colonial wars however this time around we have nuclear weapons. I think the situation is going to deteriorate fast enough that the old debt economy effectively gets left in the dust its simply not going to have time to collapse before we fall into these civilization ending resource wars.

Leaving aside the competing definitions of inflation/deflation, my outlook in early 2007 was for contraction in the auto, housing and finance sectors (and in general contraction on the discretionary side of the economy) versus rising prices for food & energy. Granted, I was surprised at the extent of the decline in demand for petroleum, but the problem is that our work suggests a long term accelerating rate of decline in net oil exports.

Note that in early 2007, the price of oil and the price of one share of Citigroup stock were both about $55, versus about $70 and $3 respectively now.

Here is an excerpt from Stoneleigh's recent post:


(34) Energy prices are first affected by demand collapse, then supply collapse, so that prices first fall and then rise enormously
(35) Ordinary people are unlikely to be able to afford oil products AT ALL within 5 years

Also, as I have previously noted, during the Great Depression, worldwide oil demand, after falling in 1930, rose throughout the Thirties, and actual (nominal) oil prices rose at about +11%/year from the summer of 1931 to the summer of 1937. And there were more cars on the road in the US in 1937 than in 1929. I suspect that China is to our current predicament as the US was to the Thirties.

In any case, here are the links to my 2006 and 2007 articles that addressed the debt bubble versus a projected long term accelerating decline in net oil exports:

Net Oil Exports Revisited (August, 2006)

Mr. Witter estimates that a simple revision to the mean suggests a 30% drop in residential property values in the US over the next three years. This is without considering in the effect of further increases in energy prices.

I believe that vast expanses of American Suburbia are going to become virtually abandoned in the years ahead. Alan Drake has noted that a good deal of suburbia was so poorly constructed that a lot of it is biodegradable. Alan has outlined how we can go back to what we used to have: electric trolley cars connected to electric light rail lines.

The ELP Plan (April, 2007)

For some time, I have suggested a thought experiment. Assume that your income dropped by 50%. How would you change your lifestyle?

Many employees of Circuit City don’t have to imagine such a scenario. Many higher paid employees at Circuit City have been fired and then been told that they are welcome to apply for their old jobs, subject to about a 50% pay cut.

In my opinion, the unfortunate new reality is that we are going to see a growing labor surplus--against the backdrop of deflation in the auto/housing/finance sectors and inflation in food and energy prices. By reducing your expenses now, while you can do it voluntarily, you will at least be better prepared for whatever the future may bring.

Exactly Westexas !

You don't have to argue esoteric economics just take a look at whats happening right before your eyes.
I'd argue my economic scenario fits with the facts because I developed it from looking at the economic trends not via using pet theories.

Take what WT is saying and what I'm saying. He is 100% right but underlying that I'm suggesting we are seeing a fundamental shift in the economic model to one that not been seen in hundreds maybe thousands of years.
People expecting financial games deflation inflation regardless of how you define it are going to be in for a rude awakening is outright shortages of raw materials trump any game you can play with money.
Money no longer matters.

Memm and WT-- Ironic to see you two agreeing that the definitions of inflation/deflation are controversial, and yet below my post below I was already being lectured/educated that they aren't!

And quite what Memm's words "price inflation" and "debt deflation" mean in view of the below I shall leave to others to agree (having typed enough myself for one day)!

• Inflation is an increase in available money and credit relative to available good and services, combined with an increased velocity in money.

Excuse me, but quite who says this is the case? What evidence? On what basis do you reject the (mis?)understanding of the many millions for whom the word inflation is understood to be manifested in rising prices, indeed defined and measured thereby?

In the absence of someone on this page having started the ball rolling by saying like: "On this page we will mean blahblah when we use the word inflation, and not rising prices like most people assume.", then the assumption is extremely reasonably to the latter definition.
I suggest you are talking econo-nonsense there. Please see my comment further up for more.

And perhaps you should start by correcting the whopping errors(?) in Wikipedia?!:

From Wikipedia, the free encyclopedia
This article is about a general rise in the level of prices.
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1]

The best thing to do about that would be to not use Wikipedia as a source, it is incredibly biased. Inflation is always and everywhere a monetary phenomena. Prices respond to supply and demand for the good being priced. Higher prices are the result of more demand than supply. More fiat money printed up produces demand but not commensurate supply, that is how inflation can cause aggregate price levels to increase.

Agreed WRS. Defining inflation as rising prices is a relatively recent confusion (over the last few decades) of a perennially important concept. For more on the distinction see:

Inflation Deflated

Although inflation and deflation are commonly thought of as descriptions of rising or falling prices, this is not the case. Inflation and deflation are monetary phenomena. The terms represent either an increase or a decrease, respectively, in the supply of money and credit relative to available goods and services. Rising prices are often a lagging indicator of an increase in the effective money supply, as falling prices are of a decrease. There is an important distinction to be made between nominal prices and real prices, however. Nominal prices can be misleading as they are not adjusted for changes in the money supply and so do not reflect affordability. Real prices, which are so adjusted, are a far more important measure.

Nominal prices typically rise during inflationary times as there is more money available to support higher prices, but prices need not rise evenly, and some prices may fall, depending on other factors. In real terms the picture would be quite different, as increases would be smaller and decreases would larger. When nominal prices fall despite inflation, it means that the price in real terms is plummeting. For instance, global wage arbitrage allowed the price of imported goods to fall drastically in real terms. In deflationary times, nominal prices typically fall across the board, but prices need not fall in real terms, and, in cases of scarcity, may well rise.

Defining inflation as rising prices is a relatively recent confusion (over the last few decades) of a perennially important concept.

You miss a vital point here. Words mean what people assume them to mean, not what some obscure (to 99% of readers) texts say they mean. Virtually all the people on this page, when typing the words, mean rising and falling prices. If the word is to be used for a currently unfamiliar meaning, then it is necessary that the person introducing that meaning on this page makes that clear with a statement like "I'll be using the word in it's original technical meaning of etc". In absence of that, wickedped is correct (though I do agree about it being excruciatingly biased about all things medical; basically, official assertions are "verified" whereas all challenges are prohibited as mere unverifiable hearsay from "campaigning websites"!).

Given that your "correct" usage of the term now misleads far more people than it leads, it would make sense to refer to it instead as "inflation of money supply", or "inflation [of money supply]", so everyone understands. Yes?

BTW-In that quote you fail to make clear what you mean by nominal prices v real prices.
What may or may not be related to this is the difficulties of real real-world pricing. (Any economist should be familiar with this already I guess.) I can order from the printer 1000 copies for $10, or 2000 copies for $12, or 9000 copies for $17. What's the proper price to set, especially if I haven't a clue how many will sell, or when? Example 2: My oil well cost a zillion to build, but now that's a sunk cost and the oil just comes out a penny a gallon. How much is the "proper price"... a penny a gallon, or a zillion for the first gallon etc. So much for real prices!

Oh hang on, what you mean by "real" prices is prices which have been adjusted (for inflation[in ignorant meaning]) on the basis of some paranormal insight as to what they "should in reality" be! huh.

The article I linked to explains the distinction between real and nominal terms. Prices in real terms are adjusted for inflation. I make it very clear in everything I write what inflation is and what it is not. The original use of the term is the only one which allows people to understand what is going on, and what inevitably comes next. Central bankers deliberately foster confusion as to the nature of inflation in order to obscure their own role in its creation and to deflect attention away from the threat of deflation, about which they can do nothing but stage confidence tricks that are doomed to fail.

Your conspiracy explanation about bankers sounds all too credible. Almost as credible is what I was meanwhile thinking which is that ordinary people are totally unconscious and uninterested in the size/velocity of the money supply, but acutely conscious of their prices going up. And the media everywhere refer to price increases as inflation (as part of the conspiracy no doubt). Meanwhile, I'm not faulting your own writing of the term, just the need for a meaning-alert to the many more than one ignorants here on this site!

I don't think the media conspires to confuses people as to the nature of inflation. In their case I think they are simply ignorant of the real meaning themselves. Central bankers certainly know however. Their position as 'the man behind the curtain' doesn't benefit from too much clarity. They've staked their hopes on being able to keep everyone in the dark for long enough for confidence to return. It's a desperate gamble that's doomed to fail, as the market will keep calling every bluff. Eventually there will be a large-scale mark-to-market event that will drastically devalue whole assets classes at a stroke. The trillions of dollars of public money thrown into the giant black hole at the centre of the banking system can only postpone, not prevent, this from happening. Watch out once this sucker rally is over (probably autumn), and the decline begins again. Quantitative easing is nothing but a recipe for giving the bond market a seizure, and that would send interest rates into the double digits (significantly higher in real terms).

I'm still very suspicious about how you could "know" what is the correct adjustment to convert the nominal prices to the "real" prices. My amateur understanding of money supply/velocity is that these things cannot be definitively defined let alone measured to enable that calculation to take place. Anyway, I hope to find time to read some of your articles which may enlighten me in due course.
Meanwhile I am still wondering, is it the case that there is no sound argument for hyperinflation in the near future, because the ongoing deflationary unwinding is just far too powerful to be overcome with anything other than an impossible rate of "printing" of money?

You are right that the actual supply of of money and credit cannot readily be measured. Money supply measures do not come close to reflecting the true picture, thanks to the trillions of dollars of debt in the shadow banking system (over which central bankers have no control at all). Prices in real terms can therefore not be known precisely.

Meanwhile I am still wondering, is it the case that there is no sound argument for hyperinflation in the near future, because the ongoing deflationary unwinding is just far too powerful to be overcome with anything other than an impossible rate of "printing" of money?

Yes. Hyperinflation is quite likely once the deflationary deleveraging is over, but that is years away. Deflation will proceed until the (small amount of) remaining debt is acceptably collateralized to the (few) remaining creditors.

Correct however my opinion is that resource constraints and the resulting transition of the world economy to one effectively in a global resource war will probably happen before deflation ends.

I.e commodity price inflation from scarcity will overtake and surpass debt deflation. Indeed I'm arguing that resource wars will ensure that deflation will go to completion ( if the economy lasted ).

I just don't see the debt deflation cycle actually finishing thus we will probably simply not make it to hyperinflation. In a resource constrained world attempts at inflation are very difficult as commodity prices are the most sensitive to inflation attempts. Even now oil responds rapidly to devaluation of the dollar vs other currencies. Thus its not even clear if true hyperinflation will work as commodity prices would cause economic failure faster than the monetary system could inflate.

I'd suggest that currency collapse in the sense that the fiat currencies will simply be rejected as a form of payment will probably be a issue. And I'm thinking at the international level this will be the problem countries lose their faith in various currencies and it simply collapses. Something along the lines of Iceland effectively if we have hyperinflation in a currency its only after its been rejected as a freely tradeable currency and reverts to a local worthless script.

Everything points to hyperinflation to be something that simply adds insult to injury after the economic system of a particular country has already collapsed.

Memmel maybe I am looking at this backwards but to me a currency collapse would amount to infinite hyperinflation, anyway I can always afford to home brew my beer and who really needs pretzels.

Well you could say that but its probably closer to like when a nation is defeated in war the value of its fiat currency goes directly to zero.

Hyperinflation implies a period of stability long enough to actually print.

Thats why I don't think hyperinflation is relevant to our situation since I'm saying the economy will collapse before monetary inflation is a issue thus the currencies are worthless rendering them of zero value.

Its not the same as hyperinflation because you don't have a chance to have the inflationary buildup into hyperinflation. This actually takes time.

Right ho memmel, in a currency collapse there will be no orderly jumping ship by us precious few precocious rats, we all get get to jump together. Seems democratic at least ... or is that socialist?

My opinion is that resource constraints and the resulting transition of the world economy to one effectively in a global resource war will probably happen before deflation ends.

Agreed. I wrote about this in Energy, Finance and Hegemonic Power. I have said that I expect oil to bottom early in this depression, and that prices should escalate drastically from there as supply collapses due to resources wars and the destruction of infrastructure.

Everything points to hyperinflation to be something that simply adds insult to injury after the economic system of a particular country has already collapsed.

Agreed again. Hyperinflation awaits after deleveraging has run its course and the international debt financing model has collapsed, taking the power of the bond market with it. It is only then that serious printing can begin.

As for currency inter-relationships and teh need to concentrate on the domestic front, I covered that in The Special Relativity of Currencies.

I share memmel's suspicion that something else is going to happen before a long deleveraging completes, but I suspect other things than resource wars (which haven't exactly been great moves recently!).

Meanwhile I'm wondering why the deleveraging has to be gradual. Perhaps it's like having to hunt down reluctant people to pull their nails out. But couldn't a credibility crisis arise where all or most of the fantasy assets lose their cred simultaneously? At the moment there seem to be a lot of people imagining the "business cycle" is going to switch back to upwards one day (including those behind this false rally); eventually the delusions will become jaded and undermined by resource supply understanding. And then the whole Ponzi bursts?

Well it does not have to be but thats where details become important. Just because we are experiencing massive debt deflation does not mean we are not attempting to inflate.

Its just that printing one dollar and losing 10,000 dollars in defaulted debt still results in deflation.

Realistically we would need to print 15,000 dollars to reverse the effect of 10,000 dollars worth of debt default.

For the US for example to reverse our current deflation would require us to print like 30-50 trillion dollars.

Something like 100,000 - 150,000 thousand dollars for every man women and child in the US.

Only by effectively giving everyone 100k will we avert deflation and can even think about starting to inflate.

This may sound crazy but its effectively what people where making annually of their houses.

Even though we are not going to print enough to reverse deflation we are going to print enough to slow it down considerably by doing so we keep energy demand artificially high and probably worse malinvested.

If we actually did what we needed to do the dollar would be instantly rejected for international trade and oil would be 10,000 a barrel if anyone would even take dollars. So...

So don't confuse overall debt deflation with attempts to avert or slow it down. Effectively its a black hole if you add on additional debt in the financial work we are probably talking about 100-200 trillion dollars to actually restart inflations. Add in the rest of the world and globally I'd imagine 300 trillion.

The number is ridiculously large because the amount of debt esp long term debt subject to default is immense.
We are not just talking about recent debt but 20 years or more of debt at risk of default globally.


You make some reasonable points, but they would be far more effective if you would understand why a term like "commodity price inflation" is meaningless gobbledeegook.

Commodity prices can rise without any additions to either money supply, credit supply or velocity of money, simply if investors move their investments there, from another segment of the economy. I think we can agree that this is not inflation.

And there, of course, is the flaw in all the attempts at redefining these terms. If there were such a thing as "commodity price inflation", there'd have to be a simultaneous "deflation" elsewhere in the economy. It's not hard to argue this with examples until you're in Bizarro world.

And there, of course, is the flaw in all the attempts at redefining these terms. If there were such a thing as "commodity price inflation", there'd have to be a simultaneous "deflation" elsewhere in the economy.

Exactly actually :)

And to some extent I disagree since commodity price inflation implies everything else declines significantly in value vs commodities even money aka commodity price inflation is simply saying the rest of the economy has been significantly devalued.

In particular it become very difficult to purchase energy esp oil perform work and generate significant value add.
Only if you create a monopoly that allows you to charge enough to make a profit can you actually generate a profit. Most industries however have significant over capacity spread across a number of companies so in general profit margins fall quickly to zero or often negative.

This is not unlike ancient times when salt was worth its weight in gold in some places.

Nothing wrong with Austrian school definitions but they don't take into account scarcity any more than Keynesian economics do. At the end of the day the difference between the two has far more to do with the volatility of the financial system the Keynesian approach abhors a surplus and prefers boom/bust while the Austrian approach favors steady growth. Neither applies if you have a system that is facing a shortage of a critical commodity.

I guess the best example would be starvation/lifeboat economics which can get pretty warped.

This is probably a better starting point.


Memmel, why not simply call 'commodity price inflation', 'commodity price increase'. It differentiates fluctuations in price from overall inflation/deflation? Like squeezing and changing the shape of a balloon which can be inflated or deflated? Now if that model doesn't make it, maybe we could try something in plasticine? Should stay away from working it out in the sandbox though, too many sarcastic cats with bad habits in the neighbourhood:)

Ignatz--as I said earlier, everyone here, like everyone in the big world outside from wikedpedia to the guardian to the streets (in contrast to the few educated like yourself) uses the word "inflation" to mean "rising trend of price". You have to read it in the language it is written in. And campaigns to restore language against vulgarisations are pretty hopeless. Well, anyway that's my "argument" for which I suppose I must "apologise"!

It's good to see it acknowledged that really serious inflation is a possibility somwwhere not far over the current horizon,as I have been contending for some time.

Now as to just how much the dollar can be inflated is concerned,I would remind every body that so long as Uncle can force people to accept dollars ,there is NO LIMIT on the amount of zeros that can be added to a bill.

Obviously there is a point at which every thing can collapse and checks and greenbacks will at that time be worthless.

But I can see no real reason why there shuold be a collapse to the stone age as far as current bau practices are concerned,or why a hyper inflation should necessarily follow immediately-unless the collapse to the very bottom is brought on by either war or a much worse than expected and faster than expected collapse in energy supplies due to the shark fin effect.(War in any case,and hot war,not just a more or less peaceful occupation of territory(casualties in WW2 in one day frequently exceeded yearly totals visavis Iraq ) seems to be inevitable imo.)

But even in the event of war,I believe that the major governments are powerful enough and resilient enough to maintain some sort of control for quite some time, very possibly right thru a long and nasty transition to a new economy.

Now as to the objection that printed money cannot be gotten into the hands of consumers,laws such as gauranteed minimum income can cover the situation.The Irs will be printing checks made out to people with no jobs or investments,among other things that can be done along this line.

But if one believes,as I do, that a collapse to the very bottom and the end of industrial civilization is only an altogether too real possibility,rather than a foregone conclusion,it follows that the federal American government will likely survive for the foreseeable future-and that a deliberate ,major,but hopefully controlled inflation is in the cards for all the obvious reasons.

My educated guess is that thye next couple of decades are going to be pretty rough,and that many,many,many,millions of people will die hard,especially in the parts of he world halfway between subsistence economies and the fully developed countries.Bau,subsistence sytle,can continue,and countries such as the US and Germany will some how muddle thru by adopting austerity measures and by spending every possible nickel on mitigation measures.

Of course nothing much will be done until we experience some sort of Pearl Harbor event.Let's just hope it arrives soon.Better that we suffer the event than the consequences of not getting started.

If you insist on using your definition, you de facto imply that there is such a thing as cookie inflation. Though you know it makes no sense. You may not like this, but neither can you escape it. It's quite simply a logical conclusion of what you started, that "inflation means rising prices, like most people assume." If that's where you wish to go, then that is what rising cookie prices are defined as, and it makes no difference why they rise. And precisely there lies the reason to not redefine what inflation is, no matter how misunderstood the term is. Alternatively, you'd have to come up with a new term to replace the definition of inflation, which is far too important a phenomenon not to define. And by the way, saying that I am talking econo-nonsense doesn't exactly make you look smart. Then again, that would explain your comments.

Ilargi at The Automatic Earth

Thanks but this doesn't remove the problem of most people misunderstanding due to assuming a more standard (however ignorant) meaning of the term. As for alt terminology I have already above suggested, for contexts where the modal meaning presumption is prevalent (as on TOD): "inflation of money supply" or "inflation [of money supply]" notwithstanding that it is to the specialists logically analogous to "PIN number" (i.e. Personal Identification Number number).

Such semantic sound and fury in this subthread!

If anyone were unclear on what I meant, despite my using the "incorrect" popular understanding of the terms, I might have waded into this discussion. But I don't think anyone actually was. I'm content to leave it be for now. If I should have an opportunity to address a different audience who understands and cares that "inflation is a monetary phenomenon" then I will be sure to be more circumspect.

near-certainty that by 2012, the world’s oil supply will go into terminal and relentless decline

Good article. However, while the quote above appears to be quite reasonable, I think that perhaps it is much too optimistic given the peak oil revelations over the past several months. The trends suggest we have already begun the "terminal and relentless decline" phase.