Peak Cheap Oil Ends Globalization

[zmas28]

Re: Peak Cheap Oil Ends Globalization

What struck me about the video is the notion that higher transportation costs have removed the greatest brake on inflation, the labor arbitrage. I can understand the example of steel shipments where labor is apparently a relatively smaller fraction of the overall price. However, in light of the still substantial difference in wage rates between say the US and China for example, I question whether this will have a significant impact, i.e., sufficient to generate US wage inflation?

[GRG55]

Re: Peak Cheap Oil Ends Globalization

What struck me about the video is the notion that higher transportation costs have removed the greatest brake on inflation, the labor arbitrage. I can understand the example of steel shipments where labor is apparently a relatively smaller fraction of the overall price. However, in light of the still substantial difference in wage rates between say the US and China for example, I question whether this will have a significant impact, i.e., sufficient to generate US wage inflation?

Wage inflation doesn't necessarily have to be broad based. As always in these situations there will be winners and losers. The wage inflation is going to originate in those sectors which derive increased domestic pricing power due to rising import costs, and in those service sectors where it is impractical (including politically impractical) to outsource the labour component - primarily the delivery of government/public services through monopoly providers (like unionized public sector employees).

A city cannot outsource its firefighting to China no matter how cheap the wages there, and can only cut the number of firefighters to a point before the voters start to feel "unsafe". Expect the cost of firefighters in your town to go up, as their cost of living goes up.

[Guest]

Re: Peak Cheap Oil Ends Globalization

... Some of the longest threads on this site are about the issue of inflation and it's origins, causes and consequences. Anytime a thread gets very long it's because there is an intense debate going on. That is hardly indicative of unanimity. ... This is far from the unthinking, easily influenced, monochromatic community that you repeatedly try to paint. ... that there is not "... dry, classically derived, academic unanimity - that inflationary impulses ONLY ever emanate from central banks..."

OK, due to this more engaged and serious response, I stand duly corrected - you are right, this community (of course) engages in spirited and very broadly varied viewpoints. I made the mistake of not phrasing the observation very narrowly and specifically to one thread, and beyond that thread, to this one very narrow and specific theme. Do commodities inject their own, autonomous inflationary price signals into the macro-economy? The community has long said "don't know", or "don't much care", or "no comment". The "dry, classically derived, academic unanimity" is most specific to that one thread topic. Right in around December 07, January 08, in continuing pursuit of a clarification of this one very narrow point, I posted a thread asking, "why can't inflation spring from commodities, as well as from money"? I remember the response was almost commiserating, viewed as I were putting on a slightly embarassing display of "economic illiteracy".

In that thread, I was surprised and took due note, of the unanimity of responses that this was a "misconception", because inflation "belongs to the banks to create" and commodities are an inert recipient of that monetary valuation. We hashed it out very directly, in these terms. It seemed an extremely rigid, stalely academic understanding - it envisons commodities scarcity as something which curiously remains in perpetual "price limbo" - permanently dependent upon the issuance of money from central banks. I thought it sounded absurd. And yet I remember being struck by the fact that A) so many posters were explaining why anything other than that would be "economically impossible", and B) iTulip had absolutely nothing to volunteer in clarification. That's as may be. It is only worth a remark now, because suddenly the notion that commodities can exercise an entirely independent input into the pure and narrow concept of inflation, has "shifted" imperceptibly to become a central tenet of the ongoing inflation.

I challenge anyone to locate a comment from the editors (and I sure had a hard time finding any comment on this from contributors too!) on these pages, in the last 18 months, which specifically mentions rising commodity prices as exercising a direct input into "inflation". OK, I think it's mentioned in passing within the context of the "Peak Cheap Oil" articles linked from the home page - but that makes the lack of it's mention anywhere else even more striking. That's the sole point of what I call to attention here. Now it's applauded as a "great find", but a scant six months ago when we had an entire thread dedicated to that one topic, iTulip chose not to clarify they actually agree with this idea (or they do now, anyway!), despite the fact a dozen iTulipers were posting that it was nonsense? You can't sweep these incongruities away so easily. Hello?

_________________

http://www.itulip.com/forums/showthr...24290#poststop

Quote:

Originally Posted by FRED ... The question is how the increased demand for money by a shortage of cheaply extracted, high quality oil creates commodity price inflation.

In truth, the primary question I was trying to introduce, was merely to whether a shortage of cheaply extracted oil ever even could create commodity price inflation. This seems to have been regarded as a preposterous idea here by many ther contributors only a few weeks ago? I understand you are acknowledging that it does do so in part? If you'll recall - in a previous thread only a few weeks ago, devoted to "what is inflation in commodities?" a large number of iTulipers soundly rejected the thesis that commodities scarcity could in any way cause the central bank expansion of money? That is, that "sustained commodities price rises can cause inflation also"? Perhaps this should now be clarified in an editorial, as a lot of people here seem to be under the mis-apprehension that inflation only can be "caused" by the banks in a single direction?

Quote:

Originally Posted by FRED The phrase "inflation is first and foremost a monetary phenomenon" is meant as an antidote to the commonly repeated misstatement in the business press that "rising prices are creating inflation."

This is clear and evident to all readers here, and does not need to be further clarified, let alone established.

[zmas28]

Re: Peak Cheap Oil Ends Globalization

Wage inflation doesn't necessarily have to be broad based. As always in these situations there will be winners and losers. The wage inflation is going to originate in those sectors which derive increased domestic pricing power due to rising import costs, and in those service sectors where it is impractical (including politically impractical) to outsource the labour component - primarily the delivery of government/public services through monopoly providers (like unionized public sector employees).

A city cannot outsource its firefighting to China no matter how cheap the wages there, and can only cut the number of firefighters to a point before the voters start to feel "unsafe". Expect the cost of firefighters in your town to go up, as their cost of living goes up.

True, but the question was whether increased transportation costs put a brake on the labor arbitrage, i.e. precisely on those sectors where it is practical to outsource and outsourcing in fact is taking place. Are the increased transportation costs sufficiently large to overcome the large wage discrepancy in these outsourceable sectors? Because one of the arguments hitherto has been that it is this wage arbitrage that keeps a lid on inflation that otherwise would become more widespread (we have already seen wage increases, at least in some areas that are not subject to this arbitrage).

[zmas28]

Re: Peak Cheap Oil Ends Globalization

This is my take on the inflation discussion. Too much money chasing too few goods has created inflation in the classical monetary sense of aggregate price levels. Much of this money has been created by central banks from the US to Japan and has resulted in a sea of liquidity. This excess liquidity finds its way into different asset classes (dot.com stocks, bonds, commodities) depending on the demand for that asset class, and causes price inflation of that asset class. Without the excess liquidity, the price inflation of one asset class would be accompanied by price deflation of other asset classes.
From this perspective, commodity price increases do not generate price inflation in the aggregate (in the world-wide closed system), but are a very efficient way of transmitting/distributing costs across the global economy; in contrast to say gold, the price inflation of which would tend to stay localized to gold.

[GRG55]

Re: Peak Cheap Oil Ends Globalization

True, but the question was whether increased transportation costs put a brake on the labor arbitrage, i.e. precisely on those sectors where it is practical to outsource and outsourcing in fact is taking place. Are the increased transportation costs sufficiently large to overcome the large wage discrepancy in these outsourceable sectors? Because one of the arguments hitherto has been that it is this wage arbitrage that keeps a lid on inflation that otherwise would become more widespread (we have already seen wage increases, at least in some areas that are not subject to this arbitrage).

I wrote about where the wage inflation is going to originate. Just like the sub-prime fiasco, I doubt it will be contained to those sectors.

While analysts continue to focus on differential labour costs, here's the longer term shift that I think the developed countries should be more concerned about.

The global labour arbitrage (as Steve Roach labelled it some years ago) started by exporting the production of low value, "low technology" products with relatively high labour content, once labour costs made it uneconomic to continue to produce those items in the developed world.

Transport costs are a small part of the total cost of high value goods, but often a significant portion of the final cost of low value goods. If the cost of moving stuff around the globe continues to escalate, as Jeff Rubin expects, the shift to be concerned about may have little to do with labour differentials and more to do with Asian exporting countries competing with the developed economies in the production of higher value, more advanced goods than ever before.

The US and European auto makers ignored this threat from Japan in the late 1960's (a time when anything "Made in Japan" was treated as cheap junk). In part because of the energy cost increases in the 1970's (cost to ship raw materials, direct energy input and cost to ship finished cars across the Pacific) the Japanese moved up market. Going to be interesting to see how it plays out this time.

[GRG55]

Re: Peak Cheap Oil Ends Globalization

...While analysts continue to focus on differential labour costs, here's the longer term shift that I think the developed countries should be more concerned about

The global labour arbitrage (as Steve Roach labelled it some years ago) started by exporting the production of low value, "low technology" products with relatively high labour content, once labour costs made it uneconomic to continue to produce those items in the developed world.

Transport costs are a small part of the total cost of high value goods, but often a significant portion of the final cost of low value goods. If the cost of moving stuff around the globe continues to escalate, as Jeff Rubin expects, the shift to be concerned about may have little to do with labour differentials and more to do with Asian exporting countries competing with the developed economies in the production of higher value, more advanced goods than ever before.

The US and European auto makers ignored this threat from Japan in the late 1960's (a time when anything "Made in Japan" was treated as cheap junk). In part because of the energy cost increases in the 1970's (cost to ship raw materials, direct energy input and cost to ship finished cars across the Pacific) the Japanese moved up market. Going to be interesting to see how it plays out this time.

As usual, this is a trend that iTulip is already tracking, before others have figured it out (apparently those others include the US Trade Representative) :cool::

Was watching US Trade Representative Susan C. Schwab on Charlie Rose lost night. She said the US imports a lot of low high gear, like apparel and toys, while the US compared to China exports an increasing amount of high tech gear. She said a week dollar is allowing the US to build on its strength as an exporter of high value products and services.

So we went to check the data and here's what we found from WTO reports.

Maybe we import tons of toys and clothes by unit volume but not dollar volume.

How about China's high tech exports versus the US?

Office and telco equipment exports for the US (hard to read, it's the green line on the chart) were in 2006 up to 19% to $135B from $110B since we started to debase the bonar in earnest in 2002 but are still down from the $150B level from 2000. In inflation adjusted terms, dollar volume is way down. Meanwhile, China's office and telco equipment exports are up from $75B in 2002 to $275B in 2006, a 270% gain.

Dollar depreciation sure is working wonders on the US economy to "build on our strengths."

[Guest]

Re: Peak Cheap Oil Ends Globalization

This is my take ... Too much money chasing too few goods has created inflation in the classical monetary sense of aggregate price levels. ... excess liquidity finds its way into different asset classes ... depending on the demand for that asset class, and causes price inflation of that asset class. ... commodity price increases do not generate price inflation ... but are a very efficient way of transmitting/distributing costs across the global economy.

Appreciate your input Zmas28. Here's the novel approach I was trying to introduce. Net out all factors to do with money supply - i.e. assume money supply s static, and filter out "latent inflation" accumulated from previously, just for the sake of examination. You have money as "inert" component. Now either reduce the supply of a commodity, or leave it static, and increase the supply of bids upon it. You get, as you note, an increment of comparative price on that commodity, and a concomitant reduction in available funds for other expenditures. But the "holistic insight" is that not all commodities command the same degree of financial response. The critical, "oxygen like" commodities command an instant monetary response, because they instantly disperse that price signal across a very large segment of other goods and services, draining funds from the organism. Oil does this more than any commodity. There is then "no such thing" as a static money supply in response to this predicament, when the commodity is oil, because it is the most powerful transmitter of price signals into virtually every other goods or service segment.

So you've got one new factor now introduced and fully accepted. When the primary cost transmitting commodity (oil) goes into stress in the supply demand relationship, this is an instant transmitter of sharp price increments across the entire board. You have a global economic "organism" whose "blood supply" is getting diminished (oil) therefore "plasma" (money) must be injected to replace it or the organism dies. What fraction of discretionality exists in this scenario for the "plasma" to be withheld? None. Meanwhile, oil is directly causing the price of perhaps 50%++ of that entire global economy to surge. This is why it is academic to observe that "oil price rises cannot be inflationary per se". A lot of economists outside of this small community have long agreed oil can be directly inflationary. In this community, even as recently as six months ago, this idea was not accepted easily - it's all logged in the archives - the idea being dismissed by a large number of posters six months ago, and zero comments or clarifications by editors in the past 18 months on commodities ever being capable of "causing" inflationary signals. Today it is a "great find".

All I am noting is that viewpoints have changed, but there is no admission that six months or a year ago this viewpoint was not readily or explicitly endorsed. That simple acknowledgement (hey folks, we just have endorsed something about which we were previously skeptical) seems to have some difficulty emerging, and the mere fact anyone is pointing out something this "awkward" engenders howls of indignation. :rolleyes:

http://www.itulip.com/forums/showthr...6943#post36943

[Nicolasd]

Re: Peak Cheap Oil Ends Globalization

one gigantic protest... against what?

fred. ej. someone... please!

just say...

'oh, luke you are soooo right! you are right. you are the man. you are the one. you are luke skywalker! saving us from itulip's slow ponderous analysis'!

pls! someone! tell him he's right or we'll find him curled up in the corner babbling and spitting and snapping at dogs, eyes rolled back in his head, in a puddle, slapping his own face, tearing his greasy hair, licking the walls.

Metalman , Is this what you have in mind ?

http://imagecache2.allposters.com/im...ol-Posters.jpg

(No offense to Lukester , a great debater and someone with the courage to defend his convictions against all odds.Just trying to add a little humour here )

[idianov]

Re: Peak Cheap Oil Ends Globalization

This supplement to Jeff Rubin interview contains lots of specific info on shipping costs and inflation:

CIBC World Markets: Will Soaring Transport Costs Reverse Globalization? (PDF)

Globalization is reversible. Higher energy prices are impacting transport costs at an unprecedented rate. So much so, that the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today. In fact, in tariff-equivalent terms, the explosion in global transport costs has effectively offset all the trade liberalization efforts of the last three decades. Not only does this suggest a major slowdown in the growth of world trade, but also a fundamental realignment in trade patterns. . .

With oil prices now accounting for almost half of total freight costs, it should come as no surprise that soaring oil prices have translated directly into soaring transport costs (Chart 1). Over the last three years, every one dollar rise in world oil prices has fed directly into a 1% rise in transport costs.

[Guest]

Re: Peak Cheap Oil Ends Globalization

This supplement to Jeff Rubin interview contains lots of specific info on shipping costs and inflation:

CIBC World Markets: Will Soaring Transport Costs Reverse Globalization? (PDF)

Globalization is reversible. Higher energy prices are impacting transport costs at an unprecedented rate. So much so, that the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today. In fact, in tariff-equivalent terms, the explosion in global transport costs has effectively offset all the trade liberalization efforts of the last three decades. Not only does this suggest a major slowdown in the growth of world trade, but also a fundamental realignment in trade patterns. . .

With oil prices now accounting for almost half of total freight costs, it should come as no surprise that soaring oil prices have translated directly into soaring transport costs (Chart 1). Over the last three years, every one dollar rise in world oil prices has fed directly into a 1% rise in transport costs.

Idianov - answer me this. How does this massive impairment of global trade by the "price of fuel" fit into a theory of oil's price as a pure expression of inflation? If this is all one more symptom of the generally inflating price level, why doesn't the global price structure of international commerce accomodate the new cost of transport within the same ratios to profitability as it was ten years ago? Can anyone clarify this? It seems to me, the portion of global trade occupied by the "price of fuel" today, is a completely different percentage than it was ten years ago. That seems like a "d'uh" observation, but if it's true, how can this all be pure inflation?

[metalman]

Re: Peak Cheap Oil Ends Globalization

Idianov - answer me this. How does this massive impairment of global trade by the "price of fuel" fit into a theory of oil's price as a pure expression of inflation? If this is all one more symptom of the generally inflating price level, why doesn't the global price structure of international commerce accomodate the new cost of transport within the same ratios to profitability as it was ten years ago? Can anyone clarify this? It seems to me, the portion of global trade occupied by the "price of fuel" today, is a completely different percentage than it was ten years ago. That seems like a "d'uh" observation, but if it's true, how can this all be pure inflation?

[WDCRob]

Re: Peak Cheap Oil Ends Globalization

Net out all factors to do with money supply - i.e. assume money supply s static, and filter out "latent inflation" accumulated from previously, just for the sake of examination. You have money as "inert" component. Now either reduce the supply of a commodity, or leave it static, and increase the supply of bids upon it. You get, as you note, an increment of comparative price on that commodity, and a concomitant reduction in available funds for other expenditures. But the "holistic insight" is that not all commodities command the same degree of financial response. The critical, "oxygen like" commodities command an instant monetary response, because they instantly disperse that price signal across a very large segment of other goods and services, draining funds from the organism. Oil does this more than any commodity. There is then "no such thing" as a static money supply in response to this predicament, when the commodity is oil, because it is the most powerful transmitter of price signals into virtually every other goods or service segment.

Then why has a basket of commodities risen EXACTLY AS MUCH as oil?

Under your scenario above, wouldn't those commodities rise in tandem with oil, but only to the degree that they required oil as an input? Why would the entire basket rise in lockstep?

If oil indirectly makes up only 50% of another commodity's price, why would, say, a 311% rise in the price of oil result in a 311% rise in the commodity? Wouldn't you expect something on the order of a 150% increase instead?

TIA for your response. And remember, "Brevity is the soul of wit."

Or, as 'Reading Digest' once said on the Simpsons, "Brevity is...wit."

[idianov]

Re: Peak Cheap Oil Ends Globalization

Idianov - answer me this. How does this massive impairment of global trade by the "price of fuel" fit into a theory of oil's price as a pure expression of inflation? If this is all one more symptom of the generally inflating price level, why doesn't the global price structure of international commerce accomodate the new cost of transport within the same ratios to profitability as it was ten years ago? Can anyone clarify this? It seems to me, the portion of global trade occupied by the "price of fuel" today, is a completely different percentage than it was ten years ago. That seems like a "d'uh" observation, but if it's true, how can this all be pure inflation?

Luke,

Higher energy and shipping prices result in declining profit margins If producer profit margins become negative the production stops. With low JIT inventories, there is no inventory accumulation going into recession. This sets the new price floor under any finished product or commodity. Costs of needs are to be pushed to consumers while cheap monetary policy of FIRE and government will try to support the credit demand because too much is at stake.



The result is inflation when too much money chasing diminishing supply of goods.

Igor

[Guest]

Re: Peak Cheap Oil Ends Globalization

Then why has a basket of commodities risen EXACTLY AS MUCH as oil?.

It hasn't. You are referring generically to "a basket of commodities" as though it were a single item (and you are reiterating what may be incorrectly percieved as an " iTulip AXIOM " [ orig. TM. Finster ] apparently in the process).

It has not risen "in lockstep", various commodities have been all over the map percentage wise. You are using a synthetic, (arm's length) notion of "all those commodites" as being a nice neat package. Actually, I agree with there being a large input from a fiat inflationary wave - it got a big kickoff after 09/11, but I do also know this - the oil input into most mined (and agricultural) commodities is massive, so employing those commodities to "measure" the oil price is highly imprecise. Calculations employed to "back out" the oil quotient from "the CRB" are mechanical constructs every bit as synthetic as percieving oil's price as a unidirectional set of signals coming exclusively from fiat money. Just because JK found this explanation watertight, does not mean a peer review would. If you see this methodology employed to produce certitudes with nice crisp "percentages", let alone "100% assurances", you are taking this on faith more than stringent method. Entirely absent from this method also is the extent to which the commodities (primarily oil) could be completely corrupting any "clean read" of the monetary aggregates.

Most important component of this "fiat world cosmology" missing is the attribution of "causality". If someone tells you the causality is singular, emerging from the wonks at the Federal Reserve, in my view their analysis is narrow, simplistic and brittle.

In fact what this methodology comprises of is A) the commodities compromised by the energy input, B) the money supply compromised by feedback from the commodities. C) all these yardsticks jinking around wildly in their respective ratios. This is not a reliable measuring system from which to draw conclusions at the outset.

Then you've got all the "conundrums" - like how countries with lousy balance of payments transitioned in a flash, a mere half dozen years, to being so wealthy they can buy half the DOW without breaking a sweat, all on the strength of oil earnings which are purportedly denominated in fictitious new purchasing power. There are innumerable other such "conundrums" - but they only start becoming apparent once you've abandoned your belief system as instilled here for the past 2-3 years, that it's all a fiat chimera, and start looking for more such "conundrums". I made a list of just a few of them on a Finster thread, and they were apparently dismissed in one lofty phrase as being "mere epiphenomena", (search me what this was intended to mean substantively). I felt as though I'd just paid a couple of Jackson's for a square meal of an answer, and had been given a hostess twinkie instead, while being told it was a porterhouse steak.

Everyone here is entitled to their views. I find the "pure expression of fiat inflation" thesis a brittle notion, at best. Take your pick.