Debating whether or not Oil is inflationary, is not the question.  The price of oil and the future scarcity of it, is unmistakenly inflationary.  Now if one wants to add the US FED printing presses or whatever, you have a double or triple whammy.  

Because the Government is no longer producing M3 money figures for the public, one can easily track inflation by the price of Gold.  As Gold inches over $600 an ounce and on its way to $1,000, you can deduce, there is alot of inflation going on.  If anyone still has money or investments in paper assets, unless they are good mining companies or oil service stocks.....you would be wise dumping everything in Gold and Silver bullion.

Unfortunately, the coming Inflationary Sprial and resultant Depression will be like no other felt in history.  If you can find an old-timer who lived during the depression of the thirties, they will tell you how rough it was.  Today, we do not have the billions and billons of untapped barrels of oil, millions of tons of metals and minerals that have been consumed in our Wonderful World of Suburbia.  What we have is many more millions of people living in places that will not be able to sustain them.  There will be an all out race out of the Suburbs.

Those who lived in the depression days of the thirties, were considered lucky.  They were lucky because they had decades of Dam Building, Highway building, Residential, and Commercial building, Manufacturing and etc.  Today, our future will be nothing more than a glorified "ROAD WARRIOR" type of existance.  Get ready, because playing video games and driving out to eat and to a movie will be things our children will be told around the woodburning stove fire.

http://www.weedenco.com/welling/Downloads/2006/0804welling022106.pdf

Williams is associated with the Gillespie site you posted.

They are already telegraphing the hoodwinking!  Network-level
TV commercials for a popular dollar store chain are advertising
specials for their brand authentic 'Meat Flavored" Marinara Sauce.

Watch "Repo Man" again.  Soon we may be allowed to stand in
queues for Fresh, Generic brand 'CANNED FOOD'.

Best get your real food act together while you still can.

The question in my mind is whether it is possible for the US economy to survive as consumer spending drops - regardless of price cuts.

I'll see if I can find the historical M3 data somewhere and see if this train of thought bears any fruit.

http://www.rrojasdatabank.org/agfrank/2004es02.html

"One resulting scenario is that this situation offers an opportunity for more productive and competitive Europeans to step in and replace the dollar with the euro and/or another as the world's reserve currency. However, the Europeans lack a strong state to do so. But a major step would be for Russia, OPEC and other oil exporters to price their oil in euros instead of dollars, thus increasing demand for the euro and sending the dollar crashing down. Iraq priced its oil in euros, and an important reason for the U.S. war against it was to keep others from doing the same."

IMO, we are going to see relative price increases for food and energy with relative price decreases for almost everything else, independent of the money supply (unless we go into German style hyperinflation I suppose). The debt load is going to have a powerful deflationary effect on prices as people try to liquidate assets to pay off debts--and to pay their energy and food bills.  

To put it in simplest terms, you want to be affiliated with food and energy producers; you do not want to be affiliated with (most) housing and auto companies.

Also, our GDP is very "soft" in the sense that a majority of Americans live off the discretionary income of other Americans.  We are witnessing the beginnings of a very painful transition from an economy focused on meeting "wants" to an economy focused on meeting "needs."

One piece of advice for high school and college students looking for summer jobs:  send them to a farm.

If the banks start tightening their own lending practices, there will be less money on the market. Less money supply is (in your definition) deflation. A very possible/probable future.

If the amount of available goods and services goes up by 5%, money supply should also go up by 5% in order to achieve a stable general price level.  Easy to see in a simplified economy where only bread is transacted.  If you have 10 breads and 10 $ in circulation, 1 bread = 1 $.  If you have 20 breads and still 10 $, 2 breads = 1 $, i.e. 1 bread = 0.5 $ (deflation).

This assumes the velocity of circulation of money remains constant, which is a reasonable assumption for normal situations.  All this is summarized by the Fisher Equation of the Quantity Theory of Money, which in its old form is:
MV = PT

where
M = Money Supply
V = Velocity of Circulation (the number of times money changes hands)
P = Average Price Level
T = Volume of Transactions of Goods and Services

For Austrian followers - of von Mises, not Arnold i.e. - I know Rothbard bashed the Fisher Equation here:
http://www.mises.org/rothbard/mes/chap11d.asp
He is right in that the "Average" price level is not a rigorous definition and that V is not an independently defined variable.  But I still find the equation useful.  BTW, its modern version from Friedman is:
MV = Py

where y = real NNI = Net National Income in constant dollars

From good old GDP:
NNI  = GDP + NR - CC - IT
where
NR = Net income from assets abroad (net income receipts)
CC = Consumption of fixed capital (aka D = Depreciation)
IT = Indirect taxes

By the way, the Money Supply in the equation is M1 except in countries where people can buy through direct electronic debit to their savings accounts, in which case M2 is the relevant one.  It should be noted that Mn definitions vary by country.  Notably for the US, dollars abroad (eurodollars) are only in M3, the cesation of reporting of which lends support to the notion that the game is to pay for the US debt (mostly in the hands of foreigners) and for the US trade deficit by happily printing dollars and sending them abroad to creditors and producers of real things (particularly oil).

Back to energy issues, a reduced availability of energy will result in the availability of less goods and services.  In this case, even a constant money supply will be inflationary (less breads, same dollars).  So, the conclusion of Stuart is right:

"What it looks like is the oil shock causes inflation, and then the fed raises interest rates to rein it in again."

Now to the deflation scenario, it's amazing that people with awareness of real issues like TOD'ers still consider it.  Ask yourself the following:

Are the vast majority of Americans net debtors or net creditors? (Answer: net debtors)

How deep in debt are they in average?

How much of that debt is of adjustable rate?

Are Americans going to be hurt by rising energy costs (which will happen in real terms whether there is nominal inflation of deflation)? (Answer: yes)

Will it be in the best interest of the government/ruling elite/deep politics/whatever-you-want-to-call-them to add insult to injury to the majority of the people, already hurt by energy costs, by raising interest rates?  (Answer: No)

Does it mean the US will have hyperinflation, defined as monthly inflation rate above 50 (fifty) %? (Answer: No.  I suggested how it can play out here:
http://www.theoildrum.com/story/2006/2/6/232626/0516#56 )

Is inflation good for people in debt? (Answer: Yes.  I quantified it here:
http://www.theoildrum.com/story/2006/2/6/232626/0516#27 )

Is inflation bad for creditors? (Answer: Yes)

Where are the majority of US creditors? (Answer: abroad)

Do foreign creditors vote? (Answer: in any case, in their countries ;-)

Will foreign creditors turn to the streets?  (Answer: in any case, to their streets ;-)

Will the dollar drop in value relative to other currencies? (Answer: yes, but only relative to some currencies.  Japan e.g. has fiscal and demographic problems much worse than those of the US, so they will probably print yen massively.)

What does that imply? All of the following:
a. that holders of US dollars and bonds will face untold losses
b. that Americans will be able to import much less
c. that China, etc. will produce much less unless they start producing for themselves at long last.
(Note that b. and c. above are in line with "balancing" a Peak Oil scenario.)

When financial players realize this, where will all the liquidity start going? (Answer: to commodities, related stocks, and currencies that cannot be printed: gold and silver)

The last question and the rest of the post is for gold bugs only.

Will Peak Oil bring about a new gold confiscation, a la FDR in 1933?

Answer: No, contrary to what Roland Watson (newerainvestor.com) says.

Why?

Because the 1933 gold confiscation, and the subsequent more civilized ways of keeping the public away from precious metals (the London Gold Pool of the 60's and the more recent ongoing covert manipulation denounced by GATA and recently publicly acknowledged by the BIS (see Appendix) had all one objective in common: to ensure the effectiveness of central banks' monetary policies to stimulate aggregate demand (consumption plus investment) and thus "foster maximum sustainable growth in output and employment" Bernanke, February 07, 2006, as quoted in.  That sounds like quite a good endeavour, and it would certainly be if the Earth were flat and infinite.  But it is spherical, and after Peak Oil, the "limits to growth" will be imposed by Nature, not by lack of demand.  Therefore there will be no use in stimulating it, and so in fighting the shifting of assets to gold (and silver, though heretofore I will refer only to gold for brevity).

To see why you have to keep the public away from gold in order to ensure the effectiveness of monetary policy to stimulate demand, you have to know the concept of "dollarization".  To non-economists: dollarization is the substitution of a country's currency by that of another country (usually the US dollar, more recently also the Euro) for one or more of the functions of money (first for store of value, then also for medium of exchange).  Basically, as a Latin American (or Balkan, or FSU) government started to irresponsibly print pesos (or whatever), the public started to shift their savings to dollars (or Marks, in the case of Croatia e.g.), kept mostly outside the financial system ("under the mattress"). Then they started using dollars for big transactions (like buying houses or cars).  That process advanced to different degrees in different countries, and exhibits hysteresis.  With a high degree of dollarization, monetary policy loses all effectiveness in stimulating demand: additional injected liquidity just serves to raise the exchange rate.  In other words, any excess peso people have in their pocket is used to buy dollars (or euros).  In a very dollarized economy, Fisher's V depends not only on the interest rate, but also, and mainly, on the expected devaluation, the degree of dollarization of the economy, and the elasticity of substitution between currencies.  It can become a very volatile variable.

Now, the key concept is: gold is to the dollar what the dollar is to the peso.  If Americans started shifting their savings to gold, the Fed would no longer be able to stimulate demand by monetary policy.  That's why letting US investors (who were financially smarter than those in other countries) shift their savings to gold was a no-no in 1933 (when lack of demand was the cause of the Depression), hence the gold confiscation.  This can be deduced even from books for laymen like Krugman's "The return of depression economics".  There he says something in the line of "Recessions are caused by people chasing too little scrip.  The solution is to print more scrip."  It follows that, if people are chasing a currency that cannot be printed, there is no solution.  (Actually there is no fast solution.  Even without any stimulus the US would have gotten out of the Great Depression in the long run.  The problem was that for FDR any run longer than 4 years was just too long.)

Summarizing, "metallization" (coining that word for the shifting of savings to metal-denominated assets, metallization being to OECD fiat currencies what dollarization is to pesos) was unacceptable, because it meant monetary policy would be useless to fight recessions, which up to now were always caused by lack of demand.  So, if governments and central bankers did not try to keep the public away from gold, they were not Keynesians.  And, after the miserable failure of the London Gold Pool, if they did not do it in a covert way, they were incompetent.  So GATA has been right all the way in that a manipulation was taking place, they just didn't know why.

But after PO the "limits to growth" (actually the "enforcement of negative growth rates") in economic output will not be the consequence of insufficient demand but of a relentless physical constraint from Nature, namely the decline in the production rate of fossil fuels.  Stimulating aggregate demand with monetary policy will not be able to increase output at all, as no monetary stimulus can reverse the decline of an oil field, and no monetary stimulus will be necessary to increase exploration efforts since the price of fossil fuels will be high enough to do the job by itself.  (The only investments that must be stimulated are those related to renewable energy sources, for whose financing the Central Banks should lend to the commercial banks at preferential low rates.)  Therefore, there will be no harm to the system in allowing the investing public to escape from fiat currencies and park their savings in gold or silver, since there will be no benefit to the system in stimulating their consumption of goods (and there could possibly be some harm in that: when a pub is running short of beer, they wouldn't turn on the heater to make people more thirsty).  That means:

a) that there will be no future gold confiscation.  Even in the worst case (OPEC countries demanding gold for their oil) there will still be no need for confiscation: people will surrender voluntarily their gold at the service station, and Exxon will transfer it to Aramco.  Why forcing (already discontent) people to do what they can do voluntarily?

b) that the manipulation of the gold price is bound to end.  So, GATA was also right about that, again they did not know why.  The only problem I see about that is how to communicate it to the public.  Imagine a BIS/IMF/Fed/ECB/BOJ/etc. joint declaration stating:

"Up to know we have been carrying on worldwide monetary policies conducive to stimulating demand, in order to achieve maximum sustainable growth in economic output and thus in employment.  But the relentless decline on the extraction rate of fossil fuels that was confirmed to start five years ago has rendered that endeavour completely futile, because, regardless of monetary policy, economic output will decrease year after year for several decades until we reach a really sustainable steady state.  By the way, we have now realized that any activity that consumes fossil fuels is not really sustainable, therefore the economic growth we helped achieved while the extraction rate of fossil fuels was rising was not sustainable at all.  We just hope you enjoyed it, and wish you all a happy transition to the brave new world.

Since the referred monetary policies involved as an essential component a covert manipulation of the price of gold (and collaterally of silver) intended to suppress it, we apologize to all people involved in gold and silver mining for the inconvenience."

--------
Appendix: "The" acknowledgment of the "management" of the price of gold:
"The intermediate objectives of central bank cooperation are more varied. ...
And last, the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful."
William R. White, Head of Monetary and Economic Department, BIS, on June 28, 2005 at the opening remarks of the Forth BIS Annual Conference - Past and future of central bank cooperation.
Bank for International Settlements (2006), "BIS Papers No 27 - Past and future of central bank cooperation - policy panel discussion.  Fourth BIS Annual Conference, 27-29 June 2005".
http://www.bis.org/publ/bppdf/bispap27.pdf

Michael Pollan, The Omnivore's Dilemma

which devotes a large part to the growth of corn in America and all the resultant problems such as pollution, obesity (secondary to cheap corn syrup in every grocery store and fast food product), the loss of the family farm, etc.  This author was interviewed on Terri Gross's Fresh Air show on NPR last evening.  There was no discussion of peak oil per se, but this author clearly gets the big picture of the non-sustainability of large-scale mechanized farming.

Economists of the Austrian school (which Dr. Marc Faber and Jim Puplava of Financial Sense Online subscribe to) see inflation to mean an increase in the money supply and that everything else is just a symptom of the increase in money supply.  This would be considered the more "classical" definition that has existed through many centuries of economic writings.

The Keynesian theory (which is more widely held now and is the primary theory now taught in most business schools) is that inflation is broken down by three types:

Demand pull inflation - inflation due to high demand for GDP and low unemployment, also known as Phillips Curve inflation.

"Cost push inflation - nowadays termed "supply shock inflation", due to an event such as a sudden increase in the price of oil.

Built-in inflation - induced by adaptive expectations, often linked to the "price/wage spiral" because it involves workers trying to keep their wages up with prices and then employers passing higher costs on to consumers as higher prices as part of a "vicious circle". Built-in inflation reflects events in the past, and so might be seen as hangover inflation. It is also known as "inertial" inflation, "inflationary momentum", and even "structural inflation".

http://en.wikipedia.org/wiki/Inflation

A fair number of people believe that government support of Keynesian economists through appointment of critical federal posts and grants is an effort to shift economic thinking to Keynesian and neglect to teach opposing view points, such as Austrian economics.  The purpose of this effort is to obfuscate that the true source of inflation is money creation by the Fed.  It also happens that Keynesian economics supports fiat currency by a central bank, as opposed to gold back currency or gold itself as currency.

I'll let you know. I am reviewing The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel by Stephen Leeb who runs Leeb Capital Management, Inc.

Of course, in the vast majority of cases, one should bear in mind the truth of the old adage it takes money to make money.

Gratuituous picture.

Here in the USA the minimum wage is NOT linked to the prices of essentials, thus minimum wage slaves are doubly stuffed.  Anybody who does their own grocery shopping can plainly see that prices have been rising far faster than the official CPI.  The problem with the CPI (or other offical stats on prices) is that the "basket" of items used for the calculation reflects some sort of current average lifestyle.  The true impact on people varies with their actual personal "basket" of purchases.  If food prices go up, the poor suffer more of an overall impact than the rich who spend a smaller percentage of their income on food.  And as the economy slowly collapses, the old "basket" becomes less and less relevant.  The claims that in our "new" economy energy is a smaller percentage of the total and thus less important are based on many errors, one of which is that that percentage can change (and has been changing) rapidly as energy prices rise, and spending on frivolous junk declines.

People who still have savings (other than in temporarily overvalued houses) do need to worry about how to maintain at least some of the value of those savings in terms of their power to purchase essentials.  Buying durable essentials in advance may be good.  Unless you are convinced that their nominal prices will fall.  I doubt that will happen, except for housing.  But if your house is mortgaged with a fixed rate of interest, then savings in the bank (a fixed nominal amount, even without returning any interest) that can pay X months of the mortgage now will pay X months of it later just as well, despite inflation.

When retail prices rise I think there could be serious unrest

I'm not at all sure we'll see retail prices rise:  the customers who have to fill their gas tanks and heat their houses won't have enough money to buy all the junk they're used to buying.

Of course, faced with higer costs, the manufacturers and retailers will try to raise prices.  I just don't think they'll be able to make price increases stick.

The result will be a very tough profit squeeze on manufacturers and retailers.

I don't expect unrest, either.  There might be political action (windfall profit taxes, etc.), but most Americans have very much bought into free market ideas.  They'll grumble and complain, but I wouldn't expect unrest from that quarter.

After the crash, cash is king.

Robert Shiller has been saying that the present real estate boom is the biggest financial bubble in human history, and recently the Economist has said the same thing (sorry, no link).

It is not difficult to imagine a wave of mortgage defaults, followed by desperate selling by Fannie Mae and the hedge funds -- suddenly holding vast amounts of unsellable real estate, instead of interest bearing securities.

It is easy to imagine that in five years, anyone with cash (not credit) could buy properties for pennies on the dollar. But of course, the reason for this is that few people would have cash -- and those who do will be fearfully holding onto it.  

If you hold gold, you will have to sell it for cash to buy these cheap houses (or pay for your own food, or your own mortgage); but other gold holders would also be selling to do the same thing.

If we experience something like a 1929 crash (or something even worse), then demand for commodities like oil will decline faster than the natural depletion we have been discussing, and it is conceivable that we could experience a good deal of the decline curve without ever noticing it; because demand destruction would lower prices faster than depletion would raise them.

I agree with Stuart that peak oil is inflationary; but a crashing bubble (whether post 1929, or post 1989 Japan) is strongly deflationary.

The Board of Governors of the Fed know that.

Thus U.S. House of Representatives in particular and to some extent the U.S. Senate represent the interest of debtors more than the interest of creditors.
Corporations often are huge debtors, for example. Farmers are deeply in debt. Homeowners are drowning in home-equity and credit-card debt. Recently graduated students often have extremely burdensome student loans.

The political clout of creditors--such as old people with savings in retirement accounts--is far, far inferior to the political power of debtors.

Thus I conclude, the odds against deflation are about nine to one.

Economists advise.

Politics rules.

"A banker is a guy that lands someone else's money and profits from the interest rate difference". In case of inflation it is almost irrelevant for a bank that its credits will melt - so will their liabilities. Their only loss will be their exposed net position, but I'm sure the rich guys know how to hedge it.

The opposite scenario will be much more disastrous for them. If FED overshoots interest rates, banks risk massive defaults and they will be pressed both by decreasing assets (bancrupt borrowers) and increasing in real term liabilities towards their own creditors.

http://www.investopedia.com/university/inflation/inflation1.asp

"Economists wake up in the morning hoping for a chance to debate the causes of inflation." :-)

1. Our money is debt-based, instead of asset (gold) based, and hence infinite money can be created by the FED by making loans to consumers, to the goverment (by buying treasury notes) and injecting it into the stockmarket throuh REPO operations.

2. The FED does not control the actual loans banks make - instead they throttle the loans by managing the reserve ratio (i.e. how much a bank can lend based on it's capital) and interest rates.

3. To much money chasing too few goods leads to price rises, and this would normally place a limit on how much "free" money the FED will create and allow to enter the economy. But they have a neat trick - where they "mop up" dollars, and park them in special treasury accounts for foreign banks, and pay those banks interest. I.e. our oil dollars flows to (say) Saudi Arabia, who would then accumulate a lot of excess dollars, and send them right back to America to be parked in these special accounts to earn interest. Since these dollars are not entering the mainstream economy, they do not contribute to price rises. (Even though there was money supply inflation).

The whole dollar hedgemony game is based on (a) forcing everyone to use dollars, (b) mopping up and immobilizing the used dollars to prevent price rises as much as possible (we have "only" lost 95% of the dollar since 1913), and (c) of course keeping the ability for the US FED to create new dollars to fund our deficit spending and whatever else they fancy to spend it on.

This game is now in it's final inning, and will shortly fall apart, either because foreign goverments will no longer send their money back to be "parked" (through buying treasury notes), or they will stop using dollars to buy and sell stuff, or because the accelerating rate at which the FED is now creating new money will overwhelm these mechanisms for containing the excess dollars.

Every time a loan is paid back, the "capital money" that was created originally out of thin air is cancelled out and that money dissappears from the economy.

The question of dollar inflation / deflation is then simply up to what you think the FED will do. If they allow dollars to become scarce (by curtailing loaning so much new money) they can force deflation. If they keep printing more money and finding willing lenders, they will force inflation.

EVERY GOVERMENT IN HISTORY, faced with this situation, chose to create more money.

All of this is talking about the dollar world.

If instead, you convert your money to gold, then you dont care about the dollar inflation /deflation thing. (House prices have actually DECLINED the last five years in house/ounce terms.

So, prices go up at Restoration Hardware in Palo Alto, whose customers just giggle about it anyway, after all, they have money. And prices go down at the supermercado/carneceria on the other side of 101, for those who clean the houses of those who shop at Restoration Hardware.

I agree that M1 and M2 are crude, but they are what economists mainly use.  So which other ones do you believe provide the thirty years of evidence?  (I would also point out that when the 30 years haven't had any decent-sized oil shocks in, there hasn't been much of a test.)

I am actually trying to figure out what is a reasonable metric for the total amount of money and credit in the economy, but it is non-trivial as far as I can see (if someone else knows, please enlighten me.  And it's not at all obvious to me that the Fed really controls the supply of money and credit any more.  As far as I understand it, 30 years ago, a mortgage was bank lending and the amount of it the bank could do was constrained by their reserves.  Today that mortgage will be securitized and sold off into the credit markets where many of the players are completely unregulated.  The only control the Fed has is short term rates, AFAICS, and as we've seen through the recent rate rise, long term rates didn't respond much to what the Fed was doing.

You might argue that the oil shocks restricted the economy so that money supply growth became relatively more significant thus inflationary.

Well, exactly.  The data suggest to me that the bigger the oil shock, the higher you'd better raise interest rates afterward if you want to control inflation (as long as you don't mind the resulting economic carnage).