A Touch of Stagflation?

So, the ECP (Extremely Clueless Physicist) model of the economy says that when there is less available energy, the likely economic consequence will be stagflation: simultaneous inflation and economic contraction. I articulated this model in debate over at Econbrowser some time back. The basic idea is that when there's less energy, the physical economy must contract, at least as a short term response, since all economic activities require energy, and the amount of energy required in any given activity is pretty much proportional to the amount of that activity one is doing. Since the money supply does not tend to contract immediately, there is both real economic contraction and a change in the ratio of money to real goods and services (ie inflation).

The assembled macro-economists at Econbrowser were hard on this theory, viewing inflation and economic contraction as only possible together due to clueless actions of the government based on long discredited theories. So it was with interest this morning that I read the following in the San Francisco Chronicle that accompanied my omelette: Concern rising over possibility of stagflation. Seasoned market watchers say traders may be overreacting as Dow drops 124 points

Investors and economists are growing increasingly concerned that inflation could be creeping upward even as economic activity slows.

The Dow Jones industrial average dropped nearly 124 points, or 1.19 percent, to close at 10,317.36 Wednesday, as Wall Street reacted to a report from the Institute for Supply Management showing that service sector economic activity grew in September, but more slowly than in August, and at the lowest rate since April 2003.

At the same time, the institute, an association of private sector purchasing managers, said its index of prices jumped to the highest level since the measure was devised in 1997.

Go to SFgate.com for the rest of the story.

Just what the ECP model would predict after a touch of hurricane induced energy loss follows a period of flattening energy supply...

Given how incredibly wasteful our economy is regarding energy, I have a hard time believing that decreasing energy usage implies a contracting economy.  Eventually you would reach a point where this might happen, but there is so much fat in our economy that I cannot see this happening for a while.

There would be some economic pain for those whose role in the economy is to support the wasteful use of energy - those people would feel the pain right away.

Oh. Brilliant trick.

Just pronounce some segments of the economy "fat," then when they go, the economy is not really contracting.

The "fat" votes as well, we should remember.
I think there's a small cushion of "fat" that can be trimmed. If a consumer makes three trips in an SUV to run three errands, but can be persuaded by high gasoline prices to accept a little inconvenience and consolidate the three errands into one trip, less energy is used, but the errands still get made (i.e., the consumer-based economy continues to chug along).
Since the 70's our economy's supposed to have gotten pretty efficient with energy, relatively. This is not to say there are not more gains to be made (cutting that fat, I suppose), but we should be safer than the past.

Is the recent hikeup hitting energy intensive economies (China) hard? It would make sense.

Uhm. If we're already pretty efficient, doesn't that make us more vulnerable to the Extremely Clueless Physicist's scenario, not "safer"? Fat people should do better in famines, no?
We are amazingly wasteful regarding energy. In all aspects of our society, energy is so cheap, we don't even consider it - think of the open refrigerators and freezers in supermarkets. Energy efficiency is the cheapest 'source' of energy and can be as low as 3cents/kWhr. I think energy demand is viscous - elastic but slow. It takes time to adjust to a more energy efficient lifestyle. Awareness, new products, and energy effcient technologies have to be developed and deployed. For example, I'd like to buy a Prius, but my present car is 3 years old and fine. It doesn't make financial sense to trade. But my next car in three years will be a hybrid. When natural gas prices go up, watercooler talk will start to center on insulating hot water pipes, changing HVAC air filters, replacing windows with highly insulating windows, making sure the refrigerator coils are dust free.

Fast changes in energy price force consumers to eat the price before any adaptation, reducing other consumption, thus slowing the economy. The more slowly energy costs increase, the more likely we can adapt and still have a good economy.


Henry, if you're current car is three years old (we're in the same boat in a one car household with my wife's car being 3 years old), by the time you're ready to buy a new car, you just might be buying an all electric model instead of a gasoline hybrid. So look at the bright side, you might get to leap frog some technology.
Wholesale electricity from nuclear power plants in California is 2.8 cents a kW-hr.

Check the CPUC site.

Just a little gripe here, but the interpretation of stagflation I've always heard and used is inflation accompanied by economic stagnation.  Not that realistically one's much better than the other, but wouldn't inflation accompanied by economic contraction (which, I'm slightly confused by terminology here... contraction of GROWTH or contraction of total?) be a different beast entirely? Conflation?  Inflaction? Contflation?  I bet we're probably going a bit overboard on the last one.. wouldn't want any religious right to get stirred up by confusion on that one... =D
Quoth the Wikipedia:
Stagflation is a term in macroeconomics used to describe a period of characteristic high inflation combined with economic stagnation, unemployment, or economic recession.
So I think I'm covered... Presumably gentle stagflation involves only stagnation, while fiercer instantiations of the beast bring actual recession.

The Wikipedia entry is to me hilarious for all it's careful working around all the possibilities except, to me, the obvious one. Shhhhh. Maybe, just maybe, stagflation, and reverse stagflation in the 90s, has something to do with energy supplies....

Stagflation occurred in the economies of the United Kingdom in the 1960s and 1970s and the United States in the Nixon administration of the early 1970s as reported by various news and financial sites. The difficulty in fitting its existence within a Keynesian framework led to a greater acceptance of monetarist theories in the 1970s and 1980s. The pendulum has, to some extent, swung back in the other direction as monetarism had increasing difficulty predicting the demand for money and the long period of low inflation and high employment of the 1990s - a kind of reverse of stagflation.

As of 2004 global stagflation is making a comeback with the price of oil over $40 a barrel, the US government slowly increasing interest rates, and employment rates stagnant. Monetarists and Keynesian economics continue to have difficulty explaining the phenomena.

Supply-side economics emerged as a response to US stagflation in the 1970s. It largely attributed inflation to the ending of the Bretton Woods system gold standard in 1971 and the lack of a specific price reference in the subsequent monetary policies (Keynesian and Monetarism). As a response most governments today compile consumer price indexes as part of their monetary policy.

Supply-side economics asserts that the contraction component of stagflation was caused by the inflation induced rise in real tax rates (see bracket creep). In addition certain states in the USA had laws against nominal interest rates being above a certain level and in the midst of inflation this forced real interest rates to be negative. In some places this caused a collapse in finance for business.

Heh.. that's the biggest problem with Wikipedia.  So concerned about not appearing foolish that it's hardly ever daring.  In fact, about a day after Katrina hit, when TOD was going crazy with posts, I thought it may be a good idea to update the Wiki page for Peak Oil, to make mention of it.  It was basically something along the lines of "Katrina caused great speculation within the PO community that it would be the catalyst, or at minimum a confounding influence."  It was a bit longer, with a little more detail.  But it wasn't anything speculative, nor was it factually wrong.  The PO community was, indeed, making heavy speculation at that point.  But, within about 3 minutes of me posting it, they changed it back, with the comment, "Removed horrible trolling section inserted cowardsly without sufficient proof."  LOL.  Oh well.

As far as stagflation, I go back to chaos theory and the Heidegger environmentalists.  Any natural environmental event that you try to change, you inevitable worsen.  Monetary policy causes harsher collapses than need be.

The reason you usually don't see inflation during a contraction is because of a decrease in the "velocity of money". Another way to express this is that in times of economic uncertainty, people want to hold more cash as a buffer against possible bad news. This increase in holding cash effectively reduces the amount in circulation, decreasing inflationary pressures.

One thing that distinguishes "inflation" from an increase in the cost of goods is that in inflation, wages go up along with prices. If wages are not rising then we are not seeing a general inflation of the money supply, but rather goods are getting more costly due to changes in how hard they are to make and get.

So what do you think is going on now (as described by the Chron)?
I don't think anyone really knows what is going to happen next in the economy (as in so many other things!). Sometimes people focus on changing just one variable at a time in order to simplify the analysis. So an increase in oil prices could lead to an economic slowdown. And an increase in oil prices could bubble through the economy and cause an increase in many other prices. Put these two pieces together and you have stagflation.

But they didn't do the analysis all together. If they did, they would see that the economic slowdown will reduce demand and curtail the amount people are willing to spend, making it difficult or impossible to raise prices. What might end up happening is that some prices will fall, those for which the effects of decreased demand are stronger than the effects of increased costs.

I am not an economist but what I understand is that the stagflation of the Jimmy Carter era is seen as due to bad policies on the part of the central bank. Basically they had this Keynesian model where the bank could choose any point they wanted on a curve trading off unemployment and inflation. But after playing this game for long enough, people began to factor in future inflation, building it into their contracts and such, and as a result inflation no longer had the stimulative effect that it used to. Basically Keynesianism only worked if nobody knew about it. Once people caught on to the con, the jig was up. That bill came due in the stagflation era.

I do agree the central bank has a role to play - if they raise interest rates quickly enough, they'll be able to head off inflation and prevent it getting culturally established. I lived through this particular set of policy choices in the UK in 1979 (Thatcherism) during the worst of the oil shocks. It did indeed cure inflation, but the interest rates required to do this were extremely high, and the economy became very distressed in other ways (massive unemployment, large scale loss of industrial base). OTOH, if one keeps interest rates low through an energy crisis, there'll be galloping inflation as the happily growing money supply chases less physical economy.
I should add - I strongly assume that the Greenspan fed will choose inflation fighting first, if it has to choose.
But, the main question isn't that rising cost will destroy demand.  We know that, at some point, that is true.  It's just a matter of determining how inelastic the price is.  Is it $3? $5? $10? a gallon?  Personally, while I feel the pinch at $3, I haven't changed many habits besides for cutting down on maybe one extra trip a week.  I'm certaintly not at the point of buying a bicycle.  Then again, my daily commute is about 2 miles one way.  Being unspecialized labor, I'm lucky in that area.  

As far as the relation between unemployment and inflation.. I remember the curve you're talking about.. something makes me think it's called the Rule of Seven, where for every point of unemployment gains, you gained 7 points of inflation, although that obviously can't be it.

If there's any economics specialists around..

As I've come to understand it, the two general types are inflation are cost-push and demand-pull.  They were both described to me as pulling wages along with it, although I suppose in the era of free trade, costs are now seperate from American wages.  
I know this must be obvious to some (that should include you, Halfin), but does anyone here remember the 1970's?
Hard to forget the 70's.  I started working as a statistician at the U. of Toronto in 1972 for $7200 a year; by 1974 my salary had doubled, only a little because of merit, most because of inflation.  Everyone got huge raises in the 70's just to keep up.  The Dow Jones Industrials dropped from around 1,000 to 580 from 1973 to late 1974.  That would translate into a drop from the current level of 10,300 or so to around 6,000 in 20 months.  Can it happen again? If consumer inflation takes off, and wages and savings continue to stagnate (as they have during the past 4 years), and interest rates rise to protect against the collapse of the U.S. dollar, the stock markets could collapse again. The Fed can't afford a run on the dollar, because it would mean wicked inflation here in N.A., since  oil, among other consumer items, would become very expensive in U.S. dollar terms.  Maybe that's the way it will play out, maybe that's the way energy conservation will be forced upon us.
P/E in the stock market remains at very high levels. If you have rising inflation, implying the Fed having to raise interest rates, and simultaneous economic stagnation or recession, stocks will start to look like a really lousy deal at current prices.
Excellent comment, thanks GJ.
A bank run would be probably the worst thing to happen to the stability of this country in a very long time, however my gut just says it's going to happen very soon.

Which is why I prefer to keep my cash on hand.  I don't have an insane fortune of it, so I don't worry too much about security.  Also, in the end, keeping it stored at my house doesn't do much for the sudden inflation after a bank run and replaces my run to the bank with a run to my house.  But, I figure by saving the frustrations at the banklines, I'll have time to rush home, grab the money, and take the next logical step before anybody else has the chance.  I've already located a nearby coin shop and became friendly with the owner, and he has guaranteed me he'll honor an exchange with me.  So, while everybody else is sitting with as large a pile of cash they could find for themselves, I'll hopefully be carrying 3 oz of Krugerrand.  True, it's not a fortune, but I guarantee it will become an indemand commodity, which should earn me a nice profit as I start leveraging it.  Truth be, I don't like alot of aspects of capitalism.  But when it comes down to securing limited resources for my family group, I'll probably be ruthless.

And, with that, I feel like a Dostoevsky character.

gold is in such limited circulation that I highly doubt gold or coins or precious metals will be meaningful at all if suddenly the greenback had no value.

Those with guns, or land, will do ok, provided they know how to use them. But I guess there are alread plenty of guns in the land.

The thing with gold, and why I've chosen it as my ultimate reserve medium, is not that it has much inherent value, but that its percieved to have value.  It's basically shifting the market away from the "idea" currency of dollars to a "mostly idea" currency of gold.  Which is fine.  It can be traded towards more solid forms such as land later.
Gold has eternal value, is fungible, travels well.  Twenty pounds of gold at $500 per ounce is $160,000.  Gold has no IOU's against it, unlike most currencies.  It never tarnishes, is malleable, is used in electronics and manufacturing, and has beauty.

If fiat currencies become worthless my choice for exchangeable 'currency' would be cigarettes.  When the brown organic lumps hit the fan, I'm going to load up the freezer. There are still 25% of adult Americans smoking, many of whom will trade food and guns for smokes.  Of course, then we get to that stage there may not be any electricity to power my freezer, so maybe I'll take up smoking myself (cough).

Agree about gold. Cigarettes are an interesting idea as a tradeable commodity or at least to make quick friends with someone who smokes. Why do you need to refrigerate? Will they go bad?
I'd rather choose alcohol. There will be hundred times more reasons for getting drunk in times like this (if it happens).

If I had the physical possibility I'd also have made a personal reserve of gasoline. Just in case of course.

Unfortunately, it seems like gasoline does not store well, at least in small containers, so it is difficult for your typical residential survivalist to stockpile.  Diesel fuel and its close relatives kerosene and fuel oil all seem to tolerate long term storage much better.  Ideally, you would have a diesel-powered car to burn these fuels.
Yeap, diesel fuel may be the right choice and also because it can be used for heating. It does not smell nice but at least in my country lots of people are still using it.
Smoking is one of the most physically addictive human behaviours, so cigarettes have more value, IMO, than booze.  As for keeping them in the freezer, they retain their original state considerably longer while frozen, much like frozen bread.
I would go with cofee myself. It has to be imported unlike cigarettes.
Being a smoker myself, I was pretty amused by how, during Hurricane Katrina, there were thousands complaining about lack of food and water, but every newsreel had dozens of peeople sitting around and smoking.  Good to know that when my stomach is consuming itself, and I'm dry as a bone, I'll still be able to get a smoke in. =D
Those with friends will do ok.  From my Swedish point of view it seems very "american" to value the personal gun so much.  I view the state or in realy bad times quick restoration of the states basic functions as more important. This might be since Sweden is a 9 million pop country with a state that has been fairly benign for a very long time. And since I think this is a good idea I will of course volunteer for state emergency organisations until I get too old to help.

I know that modern infrastructure is very sensitive for disturbances but i believe that people can handle more then they can imagine. But bad preparations as in civil defence, grid redundancy, etc can mean that quite a lot of people can die during emergencies while other people figure out how to keep things running.

Having a few disasters helps the preparations for worse disasters but it is a horrible thing to wish for.
For instance. Sweden were very lucky during the first world war but had civil hardship due to trade disturbances. We vere even more lucky during the second world war and in manny ways the civil hardship were less due to lessons learned during the first world war on how to handle rationing etc. We were then very well prepared to be as lucky in the thirld world war untill the end of the cold war. ;-)

If you want to protect yourself from a bank run you'd better become a debtor then a creditor (by holding cash you are crediting the economy with your labor). Fiat assets can lose their value in no time.

Of course you have to be careful what type of mortage you pick in case you choose real estate. Or simply do what everyone else is doing - spend and get in debt. I've been through this twice, and I can say that at least in my lifetime debtors have always been the winners in this game.

In some ways massive inflation could be a good thing.  Americans and the U.S. government are up to their ears in debt.  Any debt which is locked in at fixed rates diminishes rapidly in value in high-inflation periods.  Car loans and most mortgages fall in this category.

The middle class has seen no real dollar wage gains in half a decade now (median family income in the U.S. is the same as in 1999 according to the NY Times).  Corporate profits and upper class incomes have soared.  Since the middle class makes up the bulk of consumer spending, it is the driving force for long-term economic growth.  High inflation would hurt, but it would also correct the growing gap between the middle class and the rich:  the rich are investors which indirectly hold much of the middle class' debt.

Just trying to find a silver lining...

Except that while this may be true with regards to debt, in a period of stagflation, real wages aren't rising (indeed, they are probably falling), further exacerbating the income gap between rich and poor or middle class (remember spending on consumer goods constitutes a vastly larger percentage of disposable income for the poor or middle class than it does for the rich).

Put another way, yeah it may feel good to you that now your mortgage payment is only 5 or 10% of your take-home pay, but does that really mean anything when spending on essentials such as food, gas, electricity is now closer to 70%?  You certainly won't feel any "richer" than you did before, indeed you'll probably feel vastly poorer, since you'll realize that after paying the bills for essentials, you don't have a lot left over for discretionary purchases (movies, dining out, luxury goods; i.e. the things that make one feel "rich").

And the problem with private debt has never really revolved around fixed-rate, secured instruments, but rather with above-one's-means spending on consumer goods on variable-rate unsecured credit lines, whose rates WILL GO UP DRAMATICALLY with inflation.  With the new changes to the bankruptcy bill, creditors still make you pay it all off, essentially committing you to a life of wage slavery.  So instead of wiping out your bad debts and getting to keep your home, you'll be forced to liquidate your home and assests at fire-sale prices (due to collapse of new mortgage market from high interest rates), only to become what is essentially a modern-day sharecropper (to use Warren Buffett's term).


If U.S. consumers are primarily holding variable rate debt, then you are absolutely correct and we're toast.

However, if the debt is primarily fixed, then I think we may benefit as long as workers get cost-of-living increases that match inflation fairly well.  Real dollar wages would not increase, but the amount or real dollar debt would plummet.  My scenario is based on the idea that variable rate debt is a much smaller amount than fixed.  (Most debt is house + cars, a little is credit card).

If the debt is variable (lots of credit card debt), though, the interest payments will, indeed, reduce much of the middle class to sharecroppers.

In any case, if you have variable rate debt you better shed it NOW.  It doesn't hurt to be rid of it -- but having it may be a disaster in the making.


100% agreed, but my take is that variable rate debt is a bigger chunk of the debt market than you think, and right now it's the fastest growing form of debt (witness the rise of ARM's and even negative amortization mortgages in areas with ridiculous housing prices).  I don't have the numbers to back that up right now, I will go look them up though.

My other point, which I guess we could quibble on, is the impact of stagflation.  When I hear stagflation, to me that means that since there is no economic growth, employers will not have the wherewithal to both a)increase wages to at least keep pace with COLA due to inflation and b)promise a real (inflation-adjusted) rate of return to their investors.  That means something's gotta give.  My bet is it will be wages.  There will be wage freezes, and maybe even outright layoffs and cutbacks (witness the labor concessions we've been seeing in the airline industry).  In which case, average middle-class Joe will see cost-of-living consume an ever larger chunk of his take-home income, thus making him feel "poorer" regardless of how his debt's been eroded as per my analysis from my previous post.

In such a situation, it also logically follows that unsecured, variable-rate debt usage will skyrocket, as families make tough decisions between putting bread on the table and getting even deeper into debt.  Now, maybe the credit companies will finally wake up and realize that they're making a bad situation horribly worse by lending to folks with little to no ability to pay them back, but now that they've got the protections from the bankruptcy bill, I think they will continue with impunity.

But who knows?  It all depends on how spectacular the inflation is and how much the economy slows down.  Might not be as bad as we think.

(ps the other potential silver lining is that interest rates on savings accounts will also increase, providing a bit more income, though I expect this to be a minor effect)

Just want to make a comment on mortgage interest rates.
ARM loans always have a yearly increase cap and a max increase cap (Only HELOC Loans do not). I have a 3 year fixed ARM. I have an extremly low initial interest rate fixed for 3 years. After that my interest rate can fluctuate a maximum of 2% per year, and can never go over 11%. So in a situation of inflation, if my income rose also, I would benefit with a lower percentage mortage payment, even if my rate went up to 11%. This is the same with neg am loans, which I did have for a year on an investment property. The appreciation in the area dwarfed the increase in principle. Obviously this was a little risky, but it worked out very well.

What a lot of people who speculate about the housing bubble are worried about, is that after these 1 year, 3 year, and 5 year fixed rate arms start to adjust to the coming higher interests rates, people will not be able to make the new payment on their mortgage. The increase in Principle and Interest payment can be as much as $500 in one month. Thus causing increased default and the collapse of the housing bubble. I would think inflation would actually help this situation? That is a little outside my field of knowledge.

I remember the '70s. First came Nixon's malformed wage and price controls then came Carter's one upmanship of that economic illiteracy with windfall profits taxes and gasoline micromanagement. The not unexpected result was gas lines, stagflation and generally a poor economy.

U.S. oil exploration was negatively influenced by the windfall profits tax. Who knew that would make the U.S. more depndent on foreign oil? Snort!

Things got better when Carter was fired.

Yet today I am hearing rumors of windfall profits taxes and congressional investigations. Politicians never learn.

Ah, but now the economy is slowing down and inflation is going up and they haven't done any of those things yet. Methinks you might have cause and effect backwards...
Technology rules. Nitrate fixation destroyed the economic basis of farming for generations. My family were farmers back then and went through the collapse. Grandma kept them going by getting a job as a teacher for cash money while the farm reduced their living expenses dramatically by direct production and barter.
It was bright spot seismic technology that crashed oil and especially gas prices in the eighties. But people still blamed southern democrats like Carter and credited Californians like Reagan. The funny thing was, it really was the Californians that crashed energy prices. Silicon Valley broke OPEC's power, not that we ever got the credit.
"/ The funny thing was, it really was the Californians that crashed energy prices. Silicon Valley broke OPEC's power, not that we ever got the credit./"

How so, pray tell?

We made silicon faster, cheaper, and more flexible in design capabilities. This made the computers used for 3d and bright spot seismic analysis cheaper and faster, more affordable for the oil company analysts. It's not just the general improvements in size and speed, it's the ability to design the circuit on a computer to pipeline the calculations that is equally important.
There were also some efforts made in catalyst design by computer that made the refineries more efficient, but the ability to drill a hole with a greater assurance that there would actually be something there was more important for offshore fields.
Instead of looking at Gross Domestic Product, how about we look at the Net National Happiness? Money / material possessions does not = happiness.  
No kidding. But then I could go on and on about what an abject failure this American society has been for its people... where the top 5% own almost all the wealth, where we were recently ranked as having the 27th most free press in the world, where... but what's the point? I agree with you, peakguy.
When this economy actually reaches a GEOLOGICAL limit of expansion, unlike the 70's embargoes, the entire finacial system of the US will begin to collapse.  If we are no longer able to extend credit the money supply will shrink because it is completely dependent upon debt.  Ever US dollar in circulation is debt.  So expansion leads to contraction.  The net result will be hyper-inflation, not unlike what was experienced in postwar Germany and Russia...

A great read about peak oil and the collapse of the USSR in the 80's




While it is true that the Mandrake Mechanism is responsible for the expansion of the money supply, the process also works in reverse. Just as money is created when the Federal Reserve purchases bonds or other debt instruments, it is extinguished by the sale of those same items. When they are sold, the money is given back to the System and disappears into the inkwell or computer chip from which it came. Then, the same secondary ripple effect that created money through the commercial banking system causes it to be withdrawn from the economy. Furthermore, even if the Federal Reserve does not deliberately contract the money supply, the same result can and often does occur when the public decides to resist the availability of credit and reduce its debt. A man can only be tempted to borrow, he cannot be forced to do so.

There are many psychological factors involved in a decision to go into debt that can offset the easy availability of money and a low interest rate: A downturn in the economy, the threat of civil disorder, the fear of pending war, an uncertain political climate, to name just a few. Even though the Fed may try to pump money into the economy by making it abundantly available, the public can thwart that move simply by saying no, thank you. When this happens, the olds debts that are being paid off are not replaced by new ones to take their place, and the entire amount of consumer and business debt will shrink. That means the money supply also will shrink, because, in modern America, debt is money. And it is this very expansion and contraction of the monetary pool -- a phenomenon that could not occur if based upon the laws of supply and demand -- that is at the very core of practically every boom and bust that has plagued mankind throughout history.

In conclusion, it can be said that modern money is a grand illusion conjured by the magicians of finance in politics. We are living in an age of fiat money, and it is sobering to realize that every previous nation in history that has adopted such money eventually was economically destroyed by it. Furthermore, there is nothing in our present monetary structure that offers any assurances that we may be exempted from that morbid roll call.

Correction. There is one. It is still within the power of Congress to abolish the Federal Reserve System.


The American dollar has no intrinsic value. It is a classic example of fiat money with no limit to the quantity that can be produced. Its primary value lies in the willingness of people to accept it and, to that end, legal tender laws require them to do so. It is true that our money is created out of nothing, but it is more accurate to say that it is based upon debt. In one sense, therefore, our money is created out of less than nothing. The entire money supply would vanish into the bank vaults and computer chips if all debts were repaid. Under the present System, therefore, our leaders cannot allow a serious reduction in either the national or consumer debt. Charging interest on pretended loans is usury, and that has become institutionalized under the Federal Reserve System. The Mandrake Mechanism by which the Fed converts debt into money may seem complicated at first, but it is simple if one remembers that the process is not intended to be logical but to confuse and deceive. The end product of the Mechanism is artificial expansion of the money supply, which is the root cause of the hidden tax called inflation. This expansion then leads to contraction and, together, they produce the destructive boom-bust cycle that has plagued mankind throughout history wherever fiat money has existed.

"A man can only be tempted to borrow, he cannot be forced to do so.

When the Federal government borrows, and has the power to force the collection of taxes to repay this money....

We are living in an age of fiat money, and it is sobering to realize that every previous nation in history that has adopted such money eventually was economically destroyed by it.

I don't think that argument works.  There are four possible kinds of nations:

1-Nations that use this system and still exist.
2-Nations that don't use this system and still exist.
3-Nations that did use this system and no longer exist.
4-Nations that did not use this system and no longer exist.

If you could site examples of type #3 but NOT type #4 you could make an argument that our monetary system always fails, but you CAN site examples of type #4, so the argument fails.

Besides, how long to modern economies have to exist before they can be tallied as "not failed".  Remember that ALL societies that no longer exist "failed".

It's kind of like arguing that democracy can't work because the experiment with democracy in Greece ended and the Roman Republic became the Roman Empire.

ALL money is fiat money.  Can you eat gold?  Burn it for fuel?   Wear it for warmth, or live in it for sheleter? What is the intrinsic value of gold?  It has value only because everyone else thinks it has value.  Ten years after civilization collapses, 50 bars of gold won't buy you a box of bullets.

Many countries without paper fiat money have been destroyed.  Many countries with fiat money still exist.

And you've got the causation backwards: the definition of a recession is a decline in growth of GDP.  That only happens if people are buying less stuff.  And that only happens because people are borrowing less - according to die-hard monetarists, it's the decline in borrowing that contracts the money supply and leads to the reduction in consumption - i.e. the recession.  In fact, if the money supply contracts FIRST, only to be followed by the decline in GDP, we should expect brief deflation because a smaller quantity of money is chasing the same quantity of goods and assets.

Frankly, this brand of idiocy is what REALLY undermines peak oil.  People with such a mindbogglingly poor understanding economics don't have a lot of credibility when it comes to forecasting economic problems like peak oil.

Gold is fiat money? Only if you redefine "fiat". Government may decree gold is or is not money but it is the people who decide what holds good over time - and gold is the winner of unbacked paper by a light year.

As for intrinsic value, what are you trying to say? Everything is assigned value and that includes a loaf of bread or a cord of wood. The bread is worthless when one is surrounded by Big Macs and Sirloin steaks, the cord of wood is useless in a desert.

The test is what has held value over time and gold/silver come out tops. Unbacked paper money requires everyone to be on a fiat system (IMF members cannot have a gold standard) so that everyone is on equal terms. The only reason that inflation hasn't blown the system apart yet is oil - pure and simple. An abundance of energy begats an abundance of money and even then money production has run ahead of oil production. When Peak Oil arrives, money production will fall but not as fast as energy production - hence inflation is here to stay.

Quite simply, deflation is anathema to any central bank. They will inflate or die.

Only if you redefine "fiat". Government may decree gold is or is not money but it is the people who decide what holds good over time - and gold is the winner of unbacked paper by a light year.

An abundance of energy begats an abundance of money and even then money production has run ahead of oil production. When Peak Oil arrives, money production will fall but not as fast as energy production - hence inflation is here to stay.

True.  But if energy is the sole determinant of the economic product of a country, (1) and if total energy inputs decline as a result of PO (2), then the constant (or gradually increasing) supply of gold chasing a declining stock of energy means that gold inflates too.

Quite simply, deflation is anathema to any central bank. They will inflate or die.

This implies that the natural result of declining energy would be de*flation, and that deflation would only be prevented by the intervention of central banks.  *HUH?!?  Which is it: runaway inflation or catastrophic deflation?  This is why the whole idea is silly.

Sure, gold beats paper.  But anyone worried about PO-related international economic meltdown would be better advised to buy dried beans and assault rifles.


(1) An assumption I think is hooey
(2) Also hooey - PO does NOT equal Peak Energy

(1) An assumption I think is hooey
(2) Also hooey - PO does NOT equal Peak Energy

Globally net energy per capita has been decreasing steadily since 1978.  The only reason the US has been able to increase it's available net energy is by using and maintaining a powerful military, i.e. stealing/controlling energy, and exporting energy intensive industries out of the country.  Keep it coming, you may get their eventually EROEI...

"Furthermore, the expansion of our private economy may be viewed as the expansion of power, the imposition of the will and needs of those who own concentrated wealth upon the lives of those people who do not own land or factories and who live dependent lives (what Rosa Luxemburg has called "capital's blustering violence"). Therefore, the use of military force by the state in the service of private power has been a constant feature of the expansion of our economy. According to a 1969 study, the United States has been engaged in warlike activity during three-fourths of its history (in 1,782 out of 2,340 months).6 To put this dynamic in a constitutional context, persistent acts of war have been sponsored by the federal government because in order to validate the state debt, protect private property, provide military and diplomatic representation abroad, suppress insurrections and do the other things that the Constitution requires the state to do to help property owners control productive activity and markets on a global scale, the state repeatedly has had to take the side of the few who seek control against the many who resist it. In this defense of "freedom," the probability of state sponsored violence and terror is always high."
~Snip From "Toward an American Revolution"

/Globally net energy per capita has been decreasing steadily since 1978. /

So what - that's only because population growth has slightly outpaced energy consumption.

Global primary energy has risen from 6.5 Btoe to 10.1 Btoe.
Global pop in 1978 was 4.3 b, rising to 6.3 b.

So population rose 68%, and global energy rose 65%.  Yet Global GDP more than doubled, because energy efficiency rose by more than 50%.  And global population will level off in the next 30 years - so where's the problem?

The GDP figures are bogus.  Somebody can now make cell phone ringers and start a company that could add lets say 100,000 million dollars to the GDP of the US.  Think of how many thousands of companies that are nothing more than service and speculative.  What did that actually do for the country in REAL TERMS?  Why do you think are trade deficit is so huge and continually expanding?  Can you measure the REAL strength of a country by services??  The only GDP that matters is agriculture and manufacturing.  How much manufacturing does the US do anymore?   Can't you see the rest of the world is slipping into despair because decreasing net energy is overtaking them?  While the US and its allies use their military to TAKE or EXTORT energy and raw materials from weaker countries.  You have to think out of the box here.  Neoclassical economic theory is FLAWED!! http://tinyurl.com/8dbyd



"Historically, this pattern is a familiar one. Kings and emperors of bygone days were always backed up by priests and religions whose job it was to promote an ideology which served the interests of the ruler. The Roman Emperor Constantine and the English King Henry VIII both replaced state religions so as to better suit their political objectives. Today we don't have royal rulers in the West, but we have a ruling elite. Mainstream economists, trained in business school cloisters, function as a priesthood for this elite - muttering unintelligible technical incantations and then declaring absurdities to be truth. The corporate mass-media reinforces the orthodoxy in a thousand ways every day - in news and commentary and even in entertainment fare. Mumbo jumbo has served rulers down through the ages, and it is still being used today. As science or as common sense, the laissez-faire orthodoxy stands on a par with the belief in a flat Earth."

Some info on GDP "manipulation":

So, contrary to Mr. Kudlow's claims, U.S. GDP was not reduced because Americans imported too much, it was reduced because we produced too little.

"Also, as GDP includes goods and services which do not necessarily reflect higher standards of living, such as excessive legal or medical expenditures, increased outlays necessary to deter rising criminal or terrorist threats, or mere restoration of property damaged by natural disaster, it often exaggerates true economic growth."

In a world where government officials routinely change the way economic statistics are calculated, for the specific purpose of engineering a false sense of prosperity, Kudlow's suggestion seems par for the course. However, such a biased manipulation would be far more "appropriate" were Kudlow still working on the federal payroll, where such propaganda would at least be expected, rather than as a supposedly objective commentator, where unsuspecting viewers might confuse his economic cheerleading with legitimate insight, to the detriment of their financial well being.
~Peter Schiff


Energy is not the sole determinant but it is the best one and increasingly so as energy cost continues to increase as a proportion of GDP.

And, yes, gold will inflate in price, so get on board before you miss the boat. Eventually, it will not inflate as we return to a gold standard and a fixed amount of dollars/pounds/euros/yuan/yen per ounce.

As for deflation, I don't discount it as a theoretical possibility and the Fed have seen enough of the mild deflation of Japan to learn to be proactive rather than reactive like the Japs (who nevertheless avoided a catastrophic deflation by pumping the money supply as central banks will do).

Finally, I am not in the Peak Oil = Economic Meltdown camp. If that was true then perhaps dried fruit would be preferable to gold.

"Energy is not the sole determinant but it is the best one and increasingly so as energy cost continues to increase as a proportion of GDP"

Are you an economist??


"A fundamentally incorrect view of economic élan vital: the economist sees economic activity as a function of infinite "money creation", rather than a function of finite "energy stocks" and finite "energy flows". In fact, the economy is 100% dependent on available energy -- it always has been, and it always will be."
Economic students are taught that banks "create" money every time they make a loan, and that the economy is powered by money instead of energy. The juxtaposition of these two data (the first is true, the second is false) leads even Nobel Prize-winning economists to conclude they have discovered a perpetual-motion machine:

"Should we be taking steps to limit the use of these most precious stocks of society's capital so that they will still be available for our grandchildren? . Economists ask, Would future generations benefit more from larger stocks of natural capital such as oil, gas, and coal or from more produced capital such as additional scientists, better laboratories, and libraries linked together by information superhighways? ... in the long run, oil and gas are not essential." [ p. 328, ECONOMICS, Nobel Laureate Paul Samuelson and William Nordhaus; McGraw-Hill, 1998; http://www.amazon.com/exec/obidos/ASIN/0070579474/brainfood.a ]

No person has had a greater influence on the thinking of experts who have become government regulators of the world's oil and gas industries than economist Morris Adelman: "There are plenty of fossil fuels and no limit to potential electrical capacity. It is all a matter of money." [ p. 483, THE ECONOMICS OF PETROLEUM SUPPLY, by M. A. Adelman; MIT, 1993; http://www.amazon.com/exec/obidos/ASIN/0262011387/brainfood.a ]

But of course, economists like Samuelson, Nordhaus, and Adelman are wrong. The First and Second Laws of thermodynamics tells us there is a limit to potential electrical capacity -- it's not all a matter of "money", it's all a matter of "energy".


Gold or any other precious metal or stones have value because it took alot of energy to get them.  Paper currency is created with 2 cents worth of energy.  

Fiat still exists because a country's economy that can expand, because of unfettered access to energy, has expanded the money supply as credit.  Do I need to list the countries?  Those who were denied energy, no expansion, their fiat currency would collapse.  Be it because the cost of energy or sanctions of.  Like Zimbabwe.

I think your label of "idiocy" was rather juvenile.  That type of labeling is what suppresses free thinking.  Our government and fellow citizens do it to us every day.  If more people could say what they think in this country without being labeled as "fringe" or "radical" maybe 95% of the population would UNDERSTAND PEAK OIL instead of 5%.  Peak oil was the "lunatic fringe" at one time but now it's hip, lucky for us....

Here's to you EROEI...
"Now watch what you say or they'll be calling you a radical, liberal, fanatical, criminal. Won't you sign up your name, we'd like to feel you're ácceptable, respectable, presentable, a vegetable!"



Zimbabwe: living in a lunatic asylum
By Eddie Cross
Last updated: 10/05/2005 19:18:12
THIS week, we broke a milestone of sorts - the Zimbabwe dollar
collapsed to 100 000 to 1 against the US dollar.

Just three months ago it was about 25 000 to 1. A businessman in
Harare told me that in his business, inflation had been 600 per cent
in six months. There is no sign of any stop to this slide - if
anything it is accelerating.

We are weeks away from the traditional planting season and there is
still no sign of significant land preparation or major movement of
fertilizer and other inputs. Last year Mr. Mugabe confidently
predicted a 2,4 million tonne harvest of maize - plus high levels of
production of other crops including 160 000 tonnes of tobacco. We
produced about 600 000 tonnes of maize and 70 000 tonnes of tobacco -
half of it very poor quality.


a country's economy that can expand, because of unfettered access to energy, has expanded the money supply as credit.  Do I need to list the countries?

Sure.  But lets be realistic - which of the 20 largest economies in the world (accounting for more than 90% of the global economy) is going to fall apart because of Peak Oil?  Zimbabwe is a basket-case for reasons entirely unrelated to cheap energy or fiat-credit bogeymen.

Gold or any other precious metal or stones have value because it took alot of energy to get them.

No - they have value because people agree that they are beautiful and durable.  Gold and silver last a VERY long time - they don't degrade or corrode.  They are scarce.  They are desired for ornamentation, so those who command great resources will always desire to possess some quantitiy of gold.  They are easily worked from one form into anther, meaning that the gold itself is reusable.  That's why they were the basis of money.

See my previous post (just above) for the problems with your inflation-or-deflation meltdown.  In short - which is it?


PS: If you think Zimbabwe has a significant effect on the global economy, PLEASE READ ON!


I am the former head of the Zimbabwe National Financial Operations Center, a currency clearing arm of the Zimbabwe National Bank.  I am need of your assistance in the following matter....

I just thought of this, but one of the big problems with recession now then with recession, say, 70 years ago, is that recession will turn into depression much more quickly.

Imagine an economy of a total $1,000 GDP.  In recession, the growth rate may drop to 2%, which is fine.  But, the depreciation rate of our goods is also 2%, meaning we're breaking even.  In this case, we'd have to produce $20 worth of goods, to make up for the loss of $20 dollars.  Not terribly difficult.  

What does this mean though, when GDP is in the trillions of dollars?  Each drop in percentage creates a huge drop in wealth.  And instead of having to recreate $20 of wealth, we have to recreate billions in wealth, just to remain even.  The logical arguement to this is that our production is more efficient, more streamlines, etc than it was 70 years ago.  That may be true, but the reason it is that way is because of higher reliance on oil.  Meaning that not only will the lack of oil cause it's typical problems in consumer spending, etc.  It will also exacerbate our ability to keep up with our depreciation.  We'll have to keep running harder against the treadmill, exactly at the moment we are the most tired.

"Fisher [president of Dallas Fed] is one of three Fed policy makers who this week talked of an inflation threat, suggesting a pause in the Fed's interest-rate tightening is unlikely this year. The other two were St. Louis Fed Bank President William Poole and Philadelphia Fed Bank President Anthony Santomero.

A government report showed an unexpected increase in jobless claims, heightening concern about a slowdown in economic expansion ahead of tomorrow's September jobs report.

The number of Americans filing first-time claims for jobless benefits rose by 21,000 to 390,000 for the week ended Oct. 1, the Labor Department said. Economists expected 350,000 claims, according to a Bloomberg News survey.

Jobs Report

The Labor Department tomorrow will release the September non-farm payrolls report, which shows how many jobs were created or lost. Payrolls probably declined by 150,000 last month, the median estimate of economists surveyed showed.

Yesterday, a report showed evidence of slowing growth in service industries, the biggest part of the U.S. economy. Stocks tumbled across Europe and Asia today with exporters such as DaimlerChrysler AG and Samsung Electronics Co. dropping. The Morgan Stanley Capital International Asia-Pacific Index, tracking more than 1,000 companies, decreased 2.2 percent. "

the increase in joblessness is what is causing the worry about a contracting economy or recession. previous to this, people felt growth was quite strong, so they were more worried about purely inflationary pressures.


The SF Gate article sited in this post speaks of inflation rising from 2.5 to 3.6% on an annualized basis. Although this is a significant increase 3.6% is still rather benign.

But does this number truly reflect reality?, I think not. In 1998 as a means to lower COLA payments the Clinton administration implemented the recommendations of the Boskin Commission which offered a means of statistical manipulation to artificially contain the reported inflation rate.I'm not an economist and make no claim to original insight in this but from a common sense point of view the way inflation statistics are calculated doesnt come close to passing the smell test. What is the actual inflation rate, I don't know but based on anecdotal evidence such as purchasing food and gas I would suspect it's substantially more than 3.6%.

"The "core rate" is a fictional concept designed to sooth the financial markets and distract them from the reality of rising inflation. The core rate does not exist anywhere in our economy. It is a fictional concept designed to obfuscate inflation"


Ooops, a working link to the above post:


you might be amused to read Barry Rithotz's "Big Picure", where he regularly lambasts economic indicators for things like calculating "inflation - all those things that are going up in price", like energy.


Can inflation be triggered by significant declines in the dollar vs other major currencies?
Definently.  As the dollar declines, it takes more and more of them to purchase the same amount of stuff from foreign countries.  As we require more dollars to purchase goods, more money gets introduced into the dollar market, further causing inflation.

It's the action of the government at this point which determines the ultimate result; recession or depression.  And, since it's well known Greenspan prefers easy money policies, I worry about that.  Then again, I've had Econ101, and this man's life is dedicated to it.  

Well, I had Econ 101 AND 102 AND I slept in a Holiday in Express last night!

So FWIW, one of the pathways to trouble I fear is a dramatic decline in the dollar due to competition with the Euro.  If the petrodollar recycling system starts to unwind, I don't know what would describe that scenario but stagflation would probably be one of the better outcomes.  

I don't know if Iran's plans for an oil bourse next spring will start this, but there are some severe possibilities in our future from this source.

This is part of the reason I am drawn towards being against Iraninan nuclear power.  Yes, there is a danger of Iran developing nukes, but it's probably an overstate danger.  The only reason Iran - one of the most oil-rich countries in the world - wants nuke power is so they can trade off some of their production in oil being spent in electricity needs, to exporting it to foreign nations, both increasing it's revenues and incouraging foreign investment.  

I'm not comfortable with another Saudi Arabia in the middle east, thank you very much.

Are you saying that US policy should be to keep Iran and other nations we don't like poor?  If so I would disagree. Our best hope is for all nations to develop diversified and vibrant economies. The proposal to keep Iran from diversifying away from oil will result in yet another Saudi Arabia; an oil rich nation with an underemployed youth.  What do you thunk will happen when oil revenues of Iran and other ME countries peak with their population believing that the USA prevented them from planning for it?
If you guys want to get a CLUE of what the US foreign policy has been (still is) try reading "A Century Of War" by William Engdahl.


Several key chapters can be read at the link below.  Don't read them unless you are willing to loose all respect for the US...



Good points all, sort of like the situation in Iraq.  The reason the U.S. cannot possibly 'win' in Iraq, IMO, is because roughly 50% of Iraqi males are between the ages of 15 and 30, and loaded with testosterone.  They want to fight, just as males in that age group in the west participate in contact sports, join gun clubs, militia's, etc.  This demographic in Iraq resulted from the Iraq-Iran war of the 80's (which, by the way, was encouraged and partially financed by the U.S. to rid Iran of the hated Khomeni).  What goes around...

Odd that the brain trust behind the invasion of Iraq couldn't plan for that.

Remember if we sent 350,000-400,000 troops like the Generals requested and secured Iraq and established our puppet government in two years what would our options be?  We would be pressured to withdraw from the Middle East if that was accomplished.  And there is NO intention of leaving, quite the opposite actually.  Why do you think Rumsfeld "went down the list and skipped certain units that were at a higher degree of readiness to go and picked units that were lower on the list -- for reasons we don't know."?  A "loosing" war requires more troops and a sustained deployment.  Getting it yet??  If one thinks these individuals are just "incompetent" you're crazy.  There is a much bigger game at play than initially meets the eye...

Gen. Anthony Zinni
Commander in chief of the United States Central Command, 1997-2000
The first phase of the war in Iraq, the conventional phase, the major combat phase, was brilliantly done. Tommy Franks' approach to methodically move up and attack quickly probably saved a great humanitarian disaster. But the military was unprepared for the aftermath. Rumsfeld and others thought we would be greeted with roses and flowers.

When I was commander of CENTCOM, we had a plan for an invasion of Iraq, and it had specific numbers in it. We wanted to go in there with 350,000 to 380,000 troops. You didn't need that many people to defeat the Republican Guard, but you needed them for the aftermath. We knew that we would find ourselves in a situation where we had completely uprooted an authoritarian government and would need to freeze the situation: retain control, retain order, provide security, seal the borders to keep terrorists from coming in.

Lt. Gen. Claudia Kennedy
Army deputy chief of staff for intelligence, 1997-2000
From the beginning, i was asked which side I took, Shinseki's or Rumsfeld's. And I said Shinseki. I mean, Rumsfeld proudly announced that he had told General Franks to fight this war with different tactics in which they would bypass enemy strongholds and enemy resistance and keep on moving. But it was shocking to me that the secretary of defense would tell the Army how to fight. He doesn't know how to fight; he has no business telling them. It's completely within civilian authority to tell you where to fight, what our major objective is, but it is absolutely no one's business but uniformed military to tell you how to do the job. To me, it was astonishing that Rumsfeld would presume to tell four-star generals, in the Army thirty-five years, how to do their jobs.

Now here's another thing that Rumsfeld did. As he was being briefed on the war plan, he was cherry-picking the units to go. In other words, he didn't just approve the deployment list, he went down the list and skipped certain units that were at a higher degree of readiness to go and picked units that were lower on the list -- for reasons we don't know. But here's the impact: Recently, at an event, a mother told me how her son had been recruited and trained as a cook. Three weeks before he deployed to Iraq, he was told he was now a gunner. And they gave him training for three weeks, and then off he went.

Well I also think that this war is not meant to be won. My veiw is that it is a very expensive operation to save the USD (Saddam was planning to strat trading oil in euros) and the other goal - preventing China from access to Iraqi and eventually Iranian oil. When oil begins to become scarce this land will become the hell on earth and USA wants to have the advantage to try to build its military bases while the situation is relatively stable.
Oops, I realized this would read more clearly as
"Inflation minus all those things that are going up in price"
The dinosaurs died out due to lack of calories so the theory goes. Even if they had money or low interest loans to buy calories they would have died sooner or later as the essential physical input had peaked.  Alligators got insulation from the swamp and our distant ancestors the little furry critters made do with less. History always repeats.
Isnt the easy way out of this to recognise that the reasons behind the extreme situation : China and India are not immune towards recessions? And somewhere on this site soeoene poste a chart referriing to the past crisises. And as a technician i have been mazade how long its takenn peopl to even contemplate the word stagflation. And the only thing to really observe is the similarities between dot com and dot oil. Because whan china and india slows down there is nothing to support the consumption levels. And when the US ships its jobs abroad there is nothing  to motivate US overconsumption. Because in a larger context there is no diffference between the Roman empire and the US. the roads are better called internet.

So i would not be a bit surprized to see WTI drop towards 38 from 55 USD/barrel in a longer time frame. Because the alternative to stagflation is accomodation towards preservation and that means a radical change in the way we demand goods for consumption.

Because also to consider is the risk , that overblown schemes to extract are motivated exactly like the were 40 yrs ago during the first oil crisis. And the amount of oil burned by Saddam during later crises (hope i didnt misspell)
Would have made the price development a whole lot leaner on the world economy as a whole.
Because its like this. The US empire is sourcing its fuel much the same as the Romans did their corn. And the wars cost about the same taxation on government.

So therefore its relatively easy to understand that in the wake of a political enemy post cold war the US with its oillabelled leadership found it very easy to invest in another conflict to keep its forces alert.

So therefore if the US would cut its way of life when the jobs are exported then the equal amount of consumption could sustain two nations and only one does the manufacturing.

I the meantime its time to rotate the wealth generated by the oil boom in to other sectors of global econommy just to avoid stagflation. So gold is the highest in 18 yres well why did it ever drop? Because of the invention called monetarism.

So with the developments the oil industry are saying that 30 yrs of campaignign against inflation is lost.
There are alternatives and the most likely one ist to see rotation in sectors boost the DOW to near and slightly above all time highs on the back of the sectors worst beaten by the same process of deflation in sectors for the good of only energyfocus.

And from a technical perspective the Nasdaq is about the same age as the first consequences by the first energy crisis. So its a a change of life as GM found out.

I can help you by showing you the alternatives to the public fixation on energysupply that lies antother 40 yrs ahead. Just give the market another object to exploit.
The people a change of leadership that doesnt repeat solutions & scenarios thar are more than 90 yrs old.

think about it and even if you see a bounce in WTI remember what did IT sector look like five years ago?