A Stroll With Mish - "Through da-flation looking glass"

[metalman]

Re: A Stroll With Mish - "Through da-flation looking glass"

I agree with all the above. Problem I have is what is the precipitating factor and when is it going to occur?

We all have to hold SOME assets in dollars for daily transactions. At what time will every thing else be secondary to getting everything out of the dollar. When that time comes, I expect the stock market action will confirm the inflation by making steep rises in response to the loss of purchasing power of the monetary unit.

at this point i think we can say that anyone who at this point does not admit inflation is like the government... lying.

[raja]

Re: A Stroll With Mish - "Through da-flation looking glass"

When the Fed and Washington radically altered the rules of U.S. finance last month, they placed in jeopardy huge positions that had been put in place to hedge against and profit from systemic crisis. With the end of "Stage one" arises a major short squeeze in the Credit, equities, and derivatives markets. ... It is not beyond reason that a disorderly unwind of "bearish" Credit market positions could incite a mini bout of liquidity, speculation, and Credit excess that exacerbates Global Monetary Instability

In other words, this may NOT be the time to short the market . . . at least in the near-term.

[Guest]

Re: A Stroll With Mish - "Through da-flation looking glass"

Raja - I'm reading that we are shortly to break 1440 on the SPX, and now have a good shot at seeing a catapult up to 1880 by the middle of first QTR of 2009. The move was called when the SPX was floundering badly and would have represented a near 40% up-move from there. More conservative investors may wish to only nibble at this sizeable upmove correction in the larger bear market and use it as an opportunity instead to load up on bullion, which is swiftly moving down to quite attractive levels now.

Silver at $15 for instance is arguably a greatly discounted buy. That is now it's 200 day moving average, and it should easily have 100% upside from there in the next surge thereafter. That's a potential doubler in the space of a scant six months whenever the next surge up in silver should occur. Even if you were a precious metals bear it has very little downside from there, with tremendous upsde.

Gold is breaking supports suggesting it may even reach down to "kiss" $750 or $775, in which case it probably should be pounced on. That is by far the most conservative way to play this very strong correction upwards in the stock (bear) market. And anyone buying gold bulion at that price should then refuse to get shaken out of it in future corrections a few years from now, as that cost basis in the future should represent a great deal of safety and "staying power". If you see gold go down to $775 you are likely being presented with a wonderful low risk opportunity to really load up substantially. Don't buy paper gold, and most definitely don't buy paper silver, which is a true "landmine" investment.

Another way to put it might be to say that the dollar's devaluation has not much "bounce-back". In other words, the price of gold moves up gradually on it's 200 day moving average and that represents a quite hard "floor" under it for future years, as we all understand that the USD is not going to miraculously recover all the ground it is progressively losing. Once a chunk of value ground is lost in the USD, that is broadly speaking the new "floor" under the future gold price, so $775 basis in gold cost will soon become really dirt cheap.

[Finster]

Re: A Stroll With Mish - "Through da-flation looking glass"

[B]... COMMENT : [I][ Now wait just a cotton picking minnit here - if a falling dollar is part of what's making the price of oil go up, why isn't the falling dollar making any other prices go up Mish? ...

Actually other prices have been going up.

I don’t know the whole of what "Mish" has said in this context, so don’t presume to defend his views. But inflation is always and everywhere a monetary phenomenon. Rising aggregate prices, including those of oil, are inflation. All inflation. Nothing else. 100%.

I’ve addressed the argument that money supply isn’t correlating well with oil prices before, and my reasoning went unrebutted. Now here the same mythology re-emerges as if its error had never been pointed out. To recap, there is a large temporal shift between the creation of money over the course of an economic cycle (decades in extent) and consequent rising commodity prices. Early in the inflationary cycle, excess money supply goes into inflating the prices of credit. Bond prices rise. Stock prices rise. Put simply, rather than drive up the prices of things for immediate consumption, the price effects are felt in those things that represent claims on future production. This is precisely what we saw during the eighties and nineties. There was lots of money creation going on, but commodity prices didn’t rise. Rather, stock and bond prices rose.

These markets, however, in effect function as a reservoir for the excess money. Over time momentum builds, and with credit expansion being official policy as well, ultimately you get a bubble. As in a game of musical chairs, there is ultimately more claims on stuff than there is stuff. Over a period of perhaps years, credit collapses. And with it, so would money supply and prices but for the vigorous attempts of governments and banks to fight the collapse. But at this point, further money creation can no longer further inflate the credit markets. Instead it effectively adds to that inflation which was being stored away in the financial reservoir, and rather than having commodity prices rise far less than the pace at which money is created, they rise at a pace far higher than money is being created. The markets have shifted the consumer and commodity price effects of that earlier era of money creation - when it was assumed that some miracle had been wrought that permitted money supply to be expanded willy-nilly without inflationary effect - so that as far as commodity prices are concerned, all the money creation over the entire cycle comes home to roost in just that latter portion of it.

[sadsack]

Re: A Stroll With Mish - "Through da-flation looking glass"

I would like to nominate Finster's post above as one of the most lucid and insightful explanations I have discovered on iTulip.

Beautiful, simply beautiful.

[jtabeb]

Re: A Stroll With Mish - "Through da-flation looking glass"

Pure genius!

I just want to know as a CONSEQUENCE how will this manifest itself in the equities markets?

Do you agree with Dr. Hudson that the only safe place is in Short duration T-billis? If not, where do you put your assets? What's the best bet to protect yourself as this pent-up inflation comes home to roost?

Any idea's

P.S. I LOVE SHADOW STATS!!!!! B.T.W. Your annual subscription is WELL worth it!

Thanks

[Guest]

Re: A Stroll With Mish - "Through da-flation looking glass"

Actually other prices have been going up. ... I don’t know the whole of what "Mish" has said in this context, so don’t presume to defend his views. ... money supply isn’t correlating well with oil prices before, and my reasoning went unrebutted. ... Now here the same mythology re-emerges as if its error had never been pointed out. ... all the money creation over the entire cycle comes home to roost in just that latter portion of it.

Finster - you seem to have mis-attributed who was taking which position in the above "lampoon" post. Mish's article, which was the subject of comment, listed 'depreciating dollar' as "one of the causes" of a rising oil price. He then went on to describe or claim rather, that most other goods values were 'falling', or in those cases where some are observabily rising (many) he attributed it to "previous overissuance of fiat money". His entire article was intended to evidence that A) no significant inflationary money (or aggregate monetary growth) really exists today, and B) no price action is observable in any commodities today which has any bearing on current growth in global monetary aggregates, and C) denies that any 'abnormal price action' even exists in most markets at this time (at least in a peculiarly hermetic way, he refers to this as applicable within in the US internal markets).

I in fact did not make any reference in the post above you've discussed here, about various asset prices rising due to past issuance of fiat money. What I lampooned in my question "why aren't other prices rising too Mish?" was precisely what you point out. That it's illogical to claim eroding fiat dollar purchasing power is driving up the nominal price of oil, but then claim in the next breath that that same eroding purchasing power cannot be driving up the nominal prices of all other goods. Obviously the same observation holds with regard to the effect of any past issued overissuance of fiat money, acting like a 'dam' of potential inflation which is now ripping loose in all assets. It remains illogical to claim such past dammed up fiat money inflation could today be goosing the price of petroleum, yet not equally goosing other assets.

Further you note:

I’ve addressed the argument that money supply isn’t correlating well with oil prices before, and my reasoning went unrebutted. Now here the same mythology re-emerges as if its error had never been pointed out.

Not sure whether you are addressing this to Mish, or to the content of my own post. I don't recall having missed the opportunity to rebut anything in this regard in recent months, although I do recall you and I hashed this out at length a full year ago. Lots of viewpoints expressed since that time Finster. If it was addressed to me, please note that nowhere do I suggest that values of all goods cannot be inflating due to past monetary over-issuance. And Finster I long ago abandoned the idea that oil price rises were in greatest part today a factor of genuine scarcity. As Bart notes, that part is likely still very much to come in the future. But I do clearly suggest that to attribute all of the price action in petroleum and the commodities to fiat currency would be an error.

To take a glance at the massive demand emanating from the industrialising 3 billion people in the BRIC markets and insist that all commodities are levitating solely due to currency dysfunction begs the question "what if any effect upon commodities demand do you then percieve coming from the bid on these goods which is clearly today emanating from 3 billion industrialising people". Obviously that industrial event is a 'one off' in history, therefore to claim it has 'zero influence on the commodities bid' would be a strained claim.The answer to that would appear rationally to suggest that at least some bid upon commodities emanating from 3 billion industialising should be factored into the equation.

Therefore for many months now my sole suggestion has been that the bid on commodities should plausibly include 'at least some factors on the ground' as well as fiat money, past and present, because the current industrialisation is clearly one without precedent in history. It may be a humdrum observation, but that does not render it any less true, as we look at the scale of what's occurring in 1/3rd of the world. Therfore in summary I should note perhaps, that your positions here actually appear have much less in common with Mish's entire article, and a good deal more in common with my own views? Maybe if you re-read his article and my lampoon in their entirety you'd take stock that the sum of what I lampoon about Mish's views is in fact almost entirely congruent with your own assessments?

Your positions have greatly informed the ongoing fomation of my own views Finster, so I would hope you don't feel you are still arguing to clarify the same misconceptions as from a year ago, as those misconceptions are long gone. The point worthy of comment here rather should come from a straight read of Mish's original article referenced, as it is a veritable swiss cheese full of contradictory claims explaining the large currents that are swelling all around us. He's definitely wandered off into a box in his thinking here. Maybe this will be most apparent by putting aside my humorous lampoon and just reading the original article for clues as to where he is going most far astray.

REF:

http://www.itulip.com/forums/showthread.php?p=34443#poststop

USD CURRENCY'S COLLAPSE RIPPLES AROUND WORLD ... More dollars are chasing the same bags of the stuff. Same relationship between the prices of rice and oil, demonstrating the rise in oil process against the depreciating dollar. Same thing with coal, iron ore and many other goods that trade on world markets. People from China to Chile are exchanging their depreciating dollars for things of value. Whether it is rice, oil, industrial metals, gold or silver, the prices are on a long upward trend. ... This news contains echoes of Weimar Germany going global.

[jtabeb]

Re: A Stroll With Mish - "Through da-flation looking glass"

Finster - you seem to have mis-attributed who was taking which position in the above "lampoon" post. Mish's article, which was the subject of comment, listed 'depreciating dollar' as "one of the causes" of a rising oil price. He then went on to describe or claim rather, that most other goods values were 'falling', or in those cases where some are observabily rising (many) he attributed it to "previous overissuance of fiat money". His entire article was intended to evidence that A) no significant inflationary money (or aggregate monetary growth) really exists today, and B) no price action is observable in any commodities today which has any bearing on current growth in global monetary aggregates, and C) denies that any 'abnormal price action' even exists in most markets at this time (at least in a peculiarly hermetic way, he refers to this as applicable within in the US internal markets).

I in fact did not make any reference in the post above you've discussed here, about various asset prices rising due to past issuance of fiat money. What I lampooned in my question "why aren't other prices rising too Mish?" was precisely what you point out. That it's illogical to claim eroding fiat dollar purchasing power is driving up the nominal price of oil, but then claim in the next breath that that same eroding purchasing power cannot be driving up the nominal prices of all other goods. Obviously the same observation holds with regard to the effect of any past issued overissuance of fiat money, acting like a 'dam' of potential inflation which is now ripping loose in all assets. It remains illogical to claim such past dammed up fiat money inflation could today be goosing the price of petroleum, yet not equally goosing other assets.

Further you note:



Not sure whether you are addressing this to Mish, or to the content of my own post. I don't recall having missed the opportunity to rebut anything in this regard in recent months, although I do recall you and I hashed this out at length a full year ago. Lots of viewpoints expressed since that time Finster. If it was addressed to me, please note that nowhere do I suggest that values of all goods cannot be inflating due to past monetary over-issuance. And Finster I long ago abandoned the idea that oil price rises were in greatest part today a factor of genuine scarcity. As Bart notes, that part is likely still very much to come in the future. But I do clearly suggest that to attribute all of the price action in petroleum and the commodities to fiat currency would be an error.

To take a glance at the massive demand emanating from the industrialising 3 billion people in the BRIC markets and insist that all commodities are levitating solely due to currency dysfunction begs the question "what if any effect upon commodities demand do you then percieve coming from the bid on these goods which is clearly today emanating from 3 billion industrialising people". Obviously that industrial event is a 'one off' in history, therefore to claim it has 'zero influence on the commodities bid' would be a strained claim.The answer to that would appear rationally to suggest that at least some bid upon commodities emanating from 3 billion industialising should be factored into the equation.

Therefore for many months now my sole suggestion has been that the bid on commodities should plausibly include 'at least some factors on the ground' as well as fiat money, past and present, because the current industrialisation is clearly one without precedent in history. It may be a humdrum observation, but that does not render it any less true, as we look at the scale of what's occurring in 1/3rd of the world. Therfore in summary I should note perhaps, that your positions here actually appear have much less in common with Mish's entire article, and a good deal more in common with my own views? Maybe if you re-read his article and my lampoon in their entirety you'd take stock that the sum of what I lampoon about Mish's views is in fact almost entirely congruent with your own assessments?

Your positions have greatly informed the ongoing fomation of my own views Finster, so I would hope you don't feel you are still arguing to clarify the same misconceptions as from a year ago, as those misconceptions are long gone. The point worthy of comment here rather should come from a straight read of Mish's original article referenced, as it is a veritable swiss cheese full of contradictory claims explaining the large currents that are swelling all around us. He's definitely wandered off into a box in his thinking here. Maybe this will be most apparent by putting aside my humorous lampoon and just reading the original article for clues as to where he is going most far astray.

REF:

http://www.itulip.com/forums/showthr...34443#poststop

There is something wrong and right about MISH, he observes correctly but attributes incorrectly ( I think). I will say he is informative though, his stories from ground level are quite the learning experience.

What I don't understand, and what I think no one can AT THIS point, is: will dollar depreciation trump asset/dept deflation. I mean really this is the $64,000,000,000,000 question. Can the fed inflate faster than things deflate?

Another question is is the fed really attempting the above?

Another question is are they just trying to wrong foot the market?

Final question: is the present political situation a forcing function on the fed, or is the fed the forcing function on the current political situation?

In all seriousness, it's chicken and the egg time, and I'm not sure how you resolve this paradox.

I say this because one way you can read this chart
(see attached from FRED)



is that the fed is forcing inflation in a deflationary enviorment. THE other way to read this chart is that the fed is forcing hyper-inflation. The only problem is that unless you are the fed, you don't know which objective they are trying to achieve;

e.g. Hyperinflate problems away OR trying to make it look like inflation is running away when the forcing dynamic is credit deflation.

I would like all of you to give it your best, because I'm at the upper computational limits of my IQ and can't resolve this one way or the other.

I allways told myself that the only no-brainer in this was gold. The rest of my funds are captive as either stocks or T-bills, that part (which my 401K won't let me put in gold) is the part I struggle with every day BECAUSE each outcome requires a different allocation and I honestly can't tell which is the right choice.

I allways thought diversification was for assholes (per Warren Buffet "diversification overexposes you to underperforming assets and underexposes you to overperforming assets", but here I really just don't know.

Some one who does, please clue me in.

Thanks

[Guest]

Re: A Stroll With Mish - "Through da-flation looking glass"

Jtabeb -

Well in my view at least one thing is a patent absurdity - the idea that commodities are deflating. I'm not sure I understand the extent of Finster's objections to the correct description of latent inflation unfolding today, but at any rate Mish seems to claim that if it were not for "latent" inflation the commodities would be deflating. All one has to do is gaze eastwards to see a hundred reasons why latent inflation in commodities is only a part of the story.

I am perplexed as to why Finster has not weighed in further here, as he's the one who has posted some reservations as to the extent of Mish's errors, or whether I am misapprehending something overall. Mish is calling for "deflation of commodities" along with everything else, once the true (presumed) "monetary sobriety" of the Federal Government has had a chance to kick in and overcome the "latent inflation" of yesterday - then all the commodities will deflat he says. He's indicating that the monetary factors are now "restrictive". Presumably he means "US monetary factors", as he seems hesitant to delve much into what's occurring monetarily elsewhere at the broadest level (Doug Noland Territory which Mish does not seem to read).

[jtabeb]

Re: A Stroll With Mish - "Through da-flation looking glass"

Jtabeb -

Well in my view at least one thing is a patent absurdity - the idea that commodities are deflating. I'm not sure I understand the extent of Finster's objections to the correct description of latent inflation unfolding today, but at any rate Mish seems to claim that if it were not for "latent" inflation the commodities would be deflating. All one has to do is gaze eastwards to see a hundred reasons why latent inflation in commodities is only a part of the story.

I am perplexed as to why Finster has not weighed in further here, as he's the one who has posted some reservations as to the extent of Mish's errors, or whether I am misapprehending something overall. Mish is calling for "deflation of commodities" along with everything else, once the true (presumed) "monetary sobriety" of the Federal Government has had a chance to kick in and overcome the "latent inflation" of yesterday - then all the commodities will deflat he says. He's indicating that the monetary factors are now "restrictive". Presumably he means "US monetary factors", as he seems hesitant to delve much into what's occurring monetarily elsewhere at the broadest level (Doug Noland Territory which Mish does not seem to read).

Here are the most vexing thoughts I've had on this:

1. Finster directly contradicts Dr. Hudson (Hudson says Milton Friedman was wrong, Finster says MF was correct)

2. It is plausible that demand increases in a static supply environment can cause PRICE increases w/o inflation being present.

3. The dual demand/asset destruction spiral talked about on this sight perfectly fits my own mental model of how this would lay out.

http://www.itulip.com/forums/showthread.php?t=3782

4. Cash and/or credit is required to service debt or debt defaults (unless it is forgiven).

5. Price increases are running rampant in NEEDED things.

6. The price of UN-Needed things are getting cheaper.

7. If you have any free and clear income or savings every month it is loosing purchasing power AND gaining purchasing power at the same time (see 5 and 6 above)

8. Stocks do very well in a hyperinflationary environment, but only after it is recognized that a hyperinflation is taking place.

9. Is the stock market acting stupid by not seeing #3 or is it acting smart because it sees #8 is about to occur?

10. Asset price inflations are mean reverting but can currency devaluation TRUMP credit/asset price deflation? Case in point the DJIA is in a BEAR market when priced in gold but in a BULL market when priced in bonars.

11. If you have debts, inflation is good, deflation is bad, assuming you can service the debt.

I want to see a wrestling match (debate/interview) with Finster VS Hudson!

[Finster]

A Finster Rant

Finster - you seem to have mis-attributed who was taking which position in the above "lampoon" post. Mish's article, which was the subject of comment, listed 'depreciating dollar' as "one of the causes" of a rising oil price. He then went on to describe or claim rather, that most other goods values were 'falling', or in those cases where some are observabily rising (many) he attributed it to "previous overissuance of fiat money". His entire article was intended to evidence that A) no significant inflationary money (or aggregate monetary growth) really exists today, and B) no price action is observable in any commodities today which has any bearing on current growth in global monetary aggregates, and C) denies that any 'abnormal price action' even exists in most markets at this time (at least in a peculiarly hermetic way, he refers to this as applicable within in the US internal markets).

I won’t belabor the question of who took what position; my focus is on the position itself. Will try to clarify that further below. Meanwhile, it looks like we completely agree that it would be "illogical to claim eroding fiat dollar purchasing power is driving up the nominal price of oil, but then claim in the next breath that that same eroding purchasing power cannot be driving up the nominal prices of all other goods", at least insofar as commodities are concerned. FWIW, from what I have read Mish does have some good insights but mixes in a liberal dose of confusion, too. It's not clear to me what his overarching thesis here is.

Not sure whether you are addressing this to Mish, or to the content of my own post. I don't recall having missed the opportunity to rebut anything in this regard in recent months…

Did you follow the link? It was intended to refresh your memory … (…before…)

But I do clearly suggest that to attribute all of the price action in petroleum and the commodities to fiat currency would be an error.

This is the core contention, Lukester. It is indeed all of the price action. Not some, not most … but all of it.

This was the point of the "thought experiment" I posed earlier in the thread containing the linked post, and in my subsequent statement that we could have $5 oil if we wanted it. If over time (e.g. over the course of a full credit cycle) the supply of money grew no faster than the supply of physical commodities, the net price action would be identically zero. Whatever degree of scarcity or abundance may occur in the physical commodities, the same would be reflected in money. Consequently, the prices of commodities are fully dependent on the value of money and fully within the control of monetary authorities.

And Finster I long ago abandoned the idea that oil price rises were in greatest part today a factor of genuine scarcity.

You have made great progress. Now for the final step … repeat after me: Fiat currency inflation is responsible for all of the price action. Not some, not most … but all of it.

...

[Finster]

Re: A Stroll With Mish - "Through da-flation looking glass"

Here are the most vexing thoughts I've had on this:

1. Finster directly contradicts Dr. Hudson (Hudson says Milton Friedman was wrong, Finster says MF was correct)...

I want to see a wrestling match (debate/interview) with Finster VS Hudson!

I don't know what all Hudson has claimed, but it sounds like fun. Far as Friedman goes, I definitely agree with his "... always and everywhere a monetary phenomenon" statement. The central point as far as commodity prices go is that a price - any price - is simply the ratio of the market value of the commodity whose price you are quoting to that of another commodity, the monetary unit in which you are quoting it.

We need to keep in mind that we never quote the value of a barrel of oil. We only quote its price ... that ratio. We do so however as if we were talking about the value of the oil itself, hence the confusion and the need to make a conscious effort to remind ourselves that we are not, but rather expressing the relative value of two commodities, the oil and the monetary unit.

[Guest]

Re: A Finster Rant

This is the core contention, Lukester. It is indeed all of the price action. Not some, not most … but all of it.

This was the point of the "thought experiment" I posed earlier in the thread containing the linked post, and in my subsequent statement that we could have $5 oil if we wanted it. If over time (e.g. over the course of a full credit cycle) the supply of money grew no faster than the supply of physical commodities, the net price action would be identically zero. Whatever degree of scarcity or abundance may occur in the physical commodities, the same would be reflected in money. Consequently, the prices of commodities are fully dependent on the value of money and fully within the control of monetary authorities. ...

Finster - What you describe, a static quantity of currency causing commodities to regress back to their 'equilibrium value', seems to be difficult to find in any fiat currency world.

If a critical commodity is reacting to fiat money, particularly if you add in any scarcity factor (oil as strategic commodity with tightening availability) this can represent a "shock" to the equation which requires a response from the currency issuer. And that 'requiring' is also occurring in a world where governments are constantly re-jiggering money supply anyway.

No one has ever seen a world with a static money supply. You still have a statement of principle which is true - money supply is the only factor which can permit the oil price to rise, but that principle can get obscured in application by a constant flux of money supply in all economies. If this were only a single instance (just one economy with currency volumes in flux), it would remain an immediately applicable principle, but money supply in constant flux exists in all economies.

Also there is the fact that new issuance of currency can be almost an imperative for governments, (governments have to balloon the money supply during wars, which have occurred throughout history, for just one example) merely due to the shocks or urgencies occurring in economic events? Maybe it's worth noting with regard to oil, that it is a strategic commodity, so it's the first in line (with water, or food) to create 'imperatives' for government issuance of fresh currency.

Given all that, couldn't you also argue that 'commodities prices are exclusively a factor of money in circulation' is an idea which encounters difficulty translating in direct fashion into the real world of commodity prices? The argument here is that critical or strategic commodities at least, are a 'two-way street' - between for example, petroleum's stranglehold on the economy, vs. Government's 'option' to deny it any extra liquidity? Government cannot deny it that liquidity, as it would 'blow out the tires' of the economy they have to keep running.

Not trying to be argumentative here Finster. I'm seriously suggesting that in this case 'pure monetary principles' may indeed be at risk of stumbling on their way to applicability - particularly in a world approaching peak cheap oil. And you can extend these qualifiers out to the 'imperative' which countries like China and India have to industrialize, as their populations need to move forward into a higher standard of living or risk economic implosion?

That is arguably one very large 'imperative' for commodities prices to push upwards, and in direct consequence to that, for governments to 'give way' to that imperative by issuing more liquidity.

I'm not an iTulip premium member. What is the gist of EJ's post - "Why I don't believe in Peak Oil, in one chart"? If the thesis behind that thread is in any way interlinked with your argument that all commodities must be determined primarily by the monetary aggregates, the above observations may be a valid set of qualifiers?

I reiterate despite disagreeing with you on this 'crucial monetary question' which you are patiently trying to feed into my wooden head ( ) that I've broadened my views considerably reading your posts. I also generally see eye to eye with your world view around here. Consider me one of your more 'pain in the ass' students perhaps, but one who regards you with considerable loyalty.

[ POSTSCRIPT - Finster, I modified my post on this to better express what I intended. Maybe this modification can express the objection more clearly. ]

[FRED]

Re: A Stroll With Mish - "Through da-flation looking glass"

I don't what Hudson has claimed, but it sounds like fun. Far as Friedman goes, I definitely agree with his "always and everywhere a monetary phenomenon" point. The central point as far as commodity prices go is that a price - any price - is simply the ratio of the market value of the commodity whose price you are quoting to that of another commodity, the monetary unit in which you are quoting it.

We need to keep in mind that we never quote the value of a barrel of oil. We only quote its price ... that ratio. We do so however as if we were talking about the value of the oil itself, hence the confusion and the need to make a conscious effort to remind ourselves that we are not, but rather expressing the relative value of two commodities, the oil and the monetary unit.

EJ writes in:

Very well put. We remind readers to review:

Energy and Money Part I: Too Little Oil or Too Much Money?

Inflation is not only determined by the supply of goods available relative to the supply of money to buy them, but also the demand for the currency in which goods are priced relative to the supply of that currency. It can be hard to tell which factor is primarily driving prices.

While it's our view that charts tell us little about what will happen in the near term future, they are very helpful in showing relationships among factors influencing prices especially over long periods of time. These relationships can give indications of long future direction, or at least help us ask the right questions. To wit:

Key:
Gold, percent change from previous year
Fed Funds, effective rate
3 month Treasury bill, rate
CPI-U, rate

What is extraordinary about our current environment is: 1) the spread between the Fed Funds rate and the 3 month tbill, and 2) rising CPI while the Fed is cutting. Usually the Fed starts cutting just before recession starts and is fighting disflation during the rate cutting period. Not this time. CPI increased before, during, and after the cuts.

What is different this time? The dollar had declined versus strengthened.

Is the US economy slowing because of the inflation caused by a prolonged weak dollar or is the dollar weakening because of the slowing US economy? They feed into each other. Cutting rates is a gamble that this will revive the economy and that in response the dollar will appreciate. That has since the early 1980s been the cycle. What if it doesn't work this time? What if the FIRE Economy is down for the count?

[Finster]

Re: A Finster Rant

Finster - First of all please be assured I fully take your point, and acknowledge it is "true". However there is a problem. What you describe, a static quantity of currency, not only does not exist in the fiat currency era, but it in fact likely never existed in any "pure state" in the past several hundred years. Even in gold backed monetary regimes in the 17th, 18th and 19th centuries, the supply of paper monetary certificates remained always somewhat elastic, relative to the gold in the government's possession. In the 20th century of course we can clearly see that that formerly "elastic" link between the paper in circulation and the bullion backing it became first "fractional" and finally an ethereal bungee cord of truly cosmic length. Not only in Western nations, but the world over. Clearly "static money" is a concept without a home in the world where money circulates.

My point is this - your thesis is "true" but it has never existed in the real world where money is issued and used. It is always responding dynamically in quantity and credit stringency or looseness to economic conditions. Therefore if a critical commodity goes into scarcity, for whatever reason, this "shock" to the system requires a response from the currency issuer. To state that in the absence of government accomodation the oil price could go nowhere is "true" but it's a purist theory with no place to park in the real world, where money is frequently almost literally "commanded" to come forth in response to economic events, particularly acute systemic shortages in industrial society's most critical commodity - oil.

I say this with the utmost trepidation as you naturally do run circles around me at light speed on these analyses, but is this not a valid objection? I appreciate your input Finster.

I appreciate your patience with my penchant for getting into dust-ups with very smart people, Lukester ... some of the most illuminating discussions seem to come out of them.

:cool:

The answer to your question depends on the context. Keep in mind that my comments were painting in broad strokes. Of course acute systemic shortages and any number of other transient issues can and do affect the prices of commodities in general and oil in particular. Hence caveats such as "over time".

But my argument isn't based on an assumption of static money, viz. "If over time (e.g. over the course of a full credit cycle) the supply of money grew no faster than the supply of physical commodities, the net price action would be identically zero. Whatever degree of scarcity or abundance may occur in the physical commodities, the same would be reflected in money." In other words, between the end points of this "cycle" there could be significant fluctuations in both the supply of money and that of commodities, provided the net changes were similar. If the supply of physical commodities grew by 50%, for example, and the supply of money grew by 50%, all else being equal we'd expect the price to go nowhere. Oil prices in gold have been stable over time not because the supply of gold is never-changing, but because of broadly similar changes in abundance.

What actually has happened to dollar prices, however, is not even close. Without delving into the detailed data, the price of a barrel of oil has gone from something like $3.35 in 1970 to $119.35 in 2008. Oil supply has actually increased quite a bit, but money supply by orders of magnitude more. Hence the remarkable "price increase". Notice that we casually toss out those figures as the "price of oil", but crucially, they relate two variables, oil and dollars. As in "dollars per barrel".

The point is to counter the endless stream of media propaganda about how oil prices went up because of hurricanes, strikes in Nigeria, greedy speculators, economic growth overseas, etceteras, as if our own government had nothing to do with it. Hurricanes were not invented yesterday, nor was labor unrest, nor global economic growth. I guess speculators - one of the latest whipping boys - didn't exist in the 1990s when oil prices were falling! And as pointed out elsewhere, oil is not the only commodity whose price has risen - not even an exceptional example - it just gets the most press.

Crucially, whether the price has risen at all is simply a function of what you price it in. We cited gold as a monetary unit above, but others work, too. For example, if you happened to be a Brazilian doing your accounting in reals the price of oil hasn’t done much of anything over the past year or two.

How can we conclude that "price of oil" even exists as an independent element of objective reality? It doesn’t! It only exists in relation to some monetary unit. And if different monetary units can tell such wildly diverging stories, we are forced to conclude that we learn from the "price of oil" much more about the monetary unit we’re using to express it in than we do about the oil.

There is another part to this story that we haven’t gotten into yet, though. If the "price of oil" doesn’t exist apart from a monetary unit, then what about the value of oil? How can we measure that? If it rose, how would we know? How could we isolate what’s happening to the value of oil? Apart from the vagaries of seemingly ephemeral, changing, monetary units? Is there some standard of market value that we could use?

I think there is an answer, or at least some credible candidates for one, but want to pose the question as food for thought. Careful consideration of that question alone may enlighten more than any number of words spilled in this post.

Then maybe we can take on Mish ... ;)