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Financial Storm



June 21, 2008 – Comments (11)

Yves has a piece suggesting the commodity price explosion is due to excessive liquidity in the financial system due to low interest rates.  The article suggest that this is a leading indicator of inflation.

One of the things that I've been saying is that if we do not see deflation, all of our costs catch up to what has basicially happened in the commodities.  Prices have typically been up about 500% in commodities and some have spiked up in the range of 1000%.

I think the grossly increased money supply is already out there and prices increases to reflect the amount of supply out there has not completed working through the economy and either it contracts, or we're going to feel nostalgia for $4/gal gas. 

11 Comments – Post Your Own

#1) On June 21, 2008 at 1:20 AM, EScroogeJr (< 20) wrote:

dwot, but you used to be in the deflationary camp, right?

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#2) On June 21, 2008 at 4:09 AM, DemonDoug (31.30) wrote:

i'm with scrooge - are you finally coming around to the inflationary/hyperinflationary scenarios?  I find it ludicrous that the government screams about commodity speculation, when the root cause of all speculation is the oversupply of money to begin with.  If money is being sent out, SOMETHING is going to be going up - this is why we have replaced the business cycle with the bubble cycle.  This is also why it's worth it to green thumb the things that are being rotated into.

Maybe you are beginning to understand my 120/barrel call, and why I'm saying 200/bbl is in the bag by 2010 with a shot at 300/bbl.

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#3) On June 21, 2008 at 8:16 AM, mandrake66 (74.09) wrote:

I think the key phrase here is "if we do not see deflation". I see deflation everywhere I look. Credit is disappearing, banks are hoarding cash, home prices are still falling hard, cars/trucks have lost resale value, etc. The few things that are rising in price have everyone's attention, but I just don't see them being the result of simple monetary inflation, at least so far as the U.S. is concerned.

Inflation is hammering developing nations, in large part because of their foolish pegs to the dollar to game their exports. This I believe is also the main reason (besides fuel subsidies, which are also disappearing) for rising food and energy costs, and when their economies collapse food/energy will no longer be a big story. Deflation is the main story inside developed nations.

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#4) On June 21, 2008 at 8:53 AM, dwot (29.24) wrote:

EScrooge and Doug I believe we are seeing deflation right now but the price increases that we are seeing are from the excess increase in money supply still working its way through the economy.

This is the money supply:

M1 and M2 Money

From the year 2000 the M2 is up about 350%.  M3 is worse.  this is money supply.  Actually, when I look at, gas prices are the closest to having price increases approaching the increase in money supply.

I think that we are seeing money supply starting to concave down although we don't have the graphs to show it yet.  Inflation is the money supply.  Price increases tend to be in response to inflation, but they are lagging. 

I am still in the deflation camp, but as always, I am using that definition as it pertains to money supply.  Many times I've said that I don't think the increases in money supply have worked their way into the economy in showing the full effect as price increases.

I am very much watching what the government does that would thwart deflation.

On oil you also have supply and demand that works into prices and oil is more suspectible to price increases due to peak oil.  Right now I think oil is being embraced with speculative glee and that is what's control price now.

mandrake, I think so as well about deflation and that was probably the wrong way to word it and perhaps should have worded it "if we do not continue to see the deflation."  Just in so many people's minds inflation = price increases, not inflation = increase money supply and both have been going in the same direction so long that it is hard to see that you could have inflation declining but prices still increasing and more often than not you see "inflation" being use in the context to mean price increases.  That's just a daily in the news.  Heck I even misuse the word every time I use it with CPI.

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#5) On June 21, 2008 at 9:01 AM, EScroogeJr (< 20) wrote:

by the way, mandrake66, I'm with you when you talk about assets. I don't agree with the BLS  that it's only groceries and gas that count. In our society, you need to own assets to afford gas and groceries, right? Then asset purchases is an integral element of consumption, and the last two years haven't been as inflationary as it might appear. The caveat is that if you revise the numbers for these two decades to account for asset inflation, that would hardly make BLS statisticians happy...

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#6) On June 21, 2008 at 9:15 AM, EScroogeJr (< 20) wrote:

dwot, last time I checked, M2 was growing at annualized rates that would make Bernanke jump out of window if he had to associate these rates with the word "inflation". The second point is that even they now stop printing money altogether, the previous two decades' increases in money supply will still be sufficient to drive the price of your daily bread much, much higher. The third point is that they still face 57 tillion dollars of unfunded promises to retirees. Do you think it will be possible to pay these debts with the printing press off?

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#7) On June 21, 2008 at 9:38 AM, mandrake66 (74.09) wrote:

One of the things that complicates the picture in developed nations, and in the US in particular, is that oil is used for so much more than anyone realizes. Agriculture is heavily dependent on oil at almost every stage, from the seed to the dinner plate. I suspect that a heavy portion of food price increases is due to oil. Manufactured products of all kinds and even the extraction costs of raw materials depend on the price of oil, even before factoring in transportation costs. The US more than any nation has tied its fate directly to the cost of oil, and has done so for decades.

So I think oil is an inflationary (meaning: price is increasing) aberration in an overall deflationary atmosphere. But the fact that a hurricane or an earthquake is an aberration doesn't make it any easier on the people experiencing one.

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#8) On June 24, 2008 at 9:30 PM, dwot (29.24) wrote:

EScroogeJr, it will be interesting to see how that whole thing is managed...

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#9) On June 25, 2008 at 12:38 AM, dwot (29.24) wrote:

EScroogeJr, this post is suggesting that money supply is contracting.

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#10) On June 25, 2008 at 5:35 AM, saunafool (< 20) wrote:

Inflation of goods, deflation of assets.

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#11) On June 25, 2008 at 8:55 AM, dwot (29.24) wrote:

saunafool, while I would agree increase price of goods and decreased price of assets, I would not necessarily call that inflation and deflation.  It goes to the definitions of money supply.

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