Can skyrocketing real oil prices create extended deflation?

[blazespinnaker]

Scenario: Oil prices go up significantly because of peak oil

a) in order to maintain purchasing power on oil, the fed has to defend the dollar
b) recession, cut in demand, unemployment .. inflation approaches 0
c) fed doesn't cut rates, because to cut rates is to lose the ability to buy oil
d) deflation

Thoughts?

[Jim Nickerson]

Re: Can skyrocketing real oil prices create extended deflation?

blaze,

Perhaps the mostly bears that visit this site have the "wind" knocked out of their fingers with regard to discussing anything to do with anything in view of the equity markets just going up and up and up.

That no one, so far, has seen a basis for arguing with Thiel's opinion you put up in the other thread today http://www.itulip.com/forums/showthread.php?t=671 could be that so much downplaying of the possibility of deflation has already been written in another thread. Perhaps no one sees anything differently now.

Anyone reading anything I write knows I don't know much about economics, but I attempt to make a couple of points.

Harry Browne says, "Deflation reduces the prices of most consumer goods and investments. As dollars become more valuable, interest rates fall dramatically. And as interest rates fall, bond prices go up." [from his book Fail-Safe Investing].

To me the question arises: what could make the bonar/dollar go up? Thiel as you referenced http://www.bloomberg.com/apps/news?p...TKA&refer=home apparently opined to the author of that article ""the dollar will strengthen against the euro as investors scale back investments in emerging markets funded by borrowing dollars." Now that is a straight-foward sentence, but I am far from understanding the exact mechanism of how that would strengthen the dollar.

If as you imply "the fed has to defend the dollar," how can than happen without there being increases in interest rates? I suppose if people stopped borrowing and began saving money, would that strengthed the dollar? Can the dollar strengthen while interest rates are being lowered? Apparently Thiel thinks "yes."

You suggest the fed doesn't cut rates which if it did would, I presume, weaken the dollar thus diminishing its value to buy oil, which Thiel thinks is going up because of realization of "peak oil."

To go back to Browne's quote. Deflation causes the dollar to become more valuable and bonds increase in value and decrease in yield.

It seems to me that something is awry with all this. If the fed, or something else in the economy strengthens the dollar, and interest rates do not fall, how can deflation occur?

I think this topic bears some pertinent discussion, none of which do I consider my attempt as being. Hopefully some people's will have time and finger energy to discuss this.

The single thing that bothers me most about the possibility of deflation is what I would characterize as some rather strong opinions on this board that it almost cannot happen. But if it could happen, it certainly would not be good for gold, and there is an abundance of bullishness here about gold. Perhaps people just don't want to discuss scenarios that might go against how they think things are likely to work out--like the market not perhaps crashing in the fall of the second presidential year.

[spunky]

Re: Can skyrocketing real oil prices create extended deflation?

Err where are we going with this post ???????


Americans need oil, period. We can only conserve so much with so many goods being transported by semi and so many commuters. It takes time and money to convert to alternative fuels and higher mpg cars ( Carter started this but of course Raygun got rid of it , to support his lackies ). . So given this to me, a appreciably rise of prices at the pump are really like a tax. Higher taxes have a greater impact on people with lower disposable income. I did the math and it would take a price rise to 4.50$ for me to park, my truck and buick and buy a compact car that gets 35mpg; that difference would make the car payment.

Jim:
I am bullish on Gold and super bullish on Silver. No silver coin or gold coin has ever went to 0 value. Ask my dad about how much his Conseco stock is worth :confused: I dont care about the " market " at all. I dont see it as a force to stop me or my investments or wealth protection. I dont need an " equity " or its derivative to invest in an certain assest class


I just to dont see this big oil pullback coming and I dont see the fed defending the dollar to 6%. I see a stagnet economy at best for Q2, Q3 with some rising prices, to me less than 1% GDP is a recession

[jk]

Re: Can skyrocketing real oil prices create extended deflation?

Scenario: Oil prices go up significantly because of peak oil

a) in order to maintain purchasing power on oil, the fed has to defend the dollar
b) recession, cut in demand, unemployment .. inflation approaches 0
c) fed doesn't cut rates, because to cut rates is to lose the ability to buy oil
d) deflation

Thoughts?

the recession you postulate in step "b" would reduce demand for oil and thus lower its price. further an american recession is likely to become a global recession because of the world's dependence on exports to the u.s. this further reduces oil demand and lowers oil prices. thus the fed doesn't have to worry about our ability to pay for oil. further, in this scenario, the fed lowering rates will be seen as pro-growth and likely increase the relative value of the dollar vis a vis other currencies.

as a more general comment: i think we have to include all the feedback loops when we analyze scenarios.

[blazespinnaker]

Re: Can skyrocketing real oil prices create extended deflation?

I dunno what thiel is really thinking. There isn't a good reference to his ideas.

[blazespinnaker]

Re: Can skyrocketing real oil prices create extended deflation?

[QUOTE=spunky]Err where are we going with this post ???????

Americans need oil, period. We can only conserve so much with so many goods being transported by semi and so many commuters. It takes time and money to convert to alternative fuels and higher mpg cars ( Carter started this but of course Raygun got rid of it , to support his lackies ). . So given this to me, a appreciably rise of prices at the pump are really like a tax. Higher taxes have a greater impact on people with lower disposable income. I did the math and it would take a price rise to 4.50$ for me to park, my truck and buick and buy a compact car that gets 35mpg; that difference would make the car payment.

I agree.... I think stagflation is a real possibility.

[blazespinnaker]

Re: Can skyrocketing real oil prices create extended deflation?

My assumption was skyrocketing real oil prices. Not entirely unlikely if decoupling takes place..

[spunky]

Re: Can skyrocketing real oil prices create extended deflation?

the recession you postulate in step "b" would reduce demand for oil and thus lower its price. further an american recession is likely to become a global recession because of the world's dependence on exports to the u.s. this further reduces oil demand and lowers oil prices. thus the fed doesn't have to worry about our ability to pay for oil. further, in this scenario, the fed lowering rates will be seen as pro-growth and likely increase the relative value of the dollar vis a vis other currencies.

as a more general comment: i think we have to include all the feedback loops when we analyze scenarios.

So I guess the price at the pump for americans/trucking companies is just based soley on supply and demand. Ha Ha Ha

Geo-political terror, manipulation of the refining supply ,weather and a hated american president have nothing to do with it JK :confused: