Paul Van Eeden: 90% Oil Price due to Fed's Inflation

[Sapiens]

http://www.cnbc.com/id/15840232?video=755108158

How to silence the talking heads...

[Jim Nickerson]

Re: Paul Van Eeden: 90% Oil Price due to Fed's Inflation

Good video, and it allows me to finally discover who "Finster" is. This guy van Eden. Funny, I never imagined Finster to be bald.

[Guest]

Re: Paul Van Eeden: 90% Oil Price due to Fed's Inflation

How to silence the talking heads...

Of course Van Eeden sounds like a genius compared to these twits - and it must be acknowledged that he makes excellent points. I only have a disagreement with one observation but it happens to be about as core an observation as exists in the entire topic - where he states that if the "money supply were held static, the oil price, along with all other prices, could not rise".

This appears to be an observation with some utility, but in fact in my view while "true" in a pure theoretical sense, it is also an academic nullity in terms of shedding any light on oil's actual price characteristics. In order to employ a policy in which "money supply is not rising" to meet GDP growth, you have to start hacking limbs off the global economic body. Therefore in practice, "static money supply" is a theoretical construct, which does not exist.

Oil along with every other commodity exists in a world where currency is in a permanent dynamic state relative to the economy. To understand whether oil can "be inflating" or "muddying up the causality within your fiat money inflation stats", your analysis has to cover the fact that oil can and does enter into a "dialogue" with money supply at periodic intervals of industrial history (wars, embargos, rapid global growth, depletion, etc).

Therefore any (admittedly quite smart) analyst like Paul Van Eeden who claims that "oil's price action is a perfect reflection of generalised inflation" is failing to note the one insight about oil which rescues it from the (highly improbable) status of inert economic component - this lifeblood of industrial GDP growth, remains in a perpetual 'dialogue" with the money supply, and it skirts perilously close to an academic fallacy to assume it is inertly subject to monetary aggregates.

For this oversight, I personally don't find his analysis definitive regarding our present times. The pure monetary aggregates thesis stumbles, when trying to incorporate a whole slew of contemporary (large) symptoms, all of which require the presence of some "real" price signal to exist within the oil.

Massive shifts of real wealth among nations, in the direction in which the oil flows from seller to buyer. Dramatic rises of expenditure to produce the energy (massive inflation rates, far exceeding even William's real inflation stats, in the oil infrastructure costs). Declining EROEI numbers which rationally require "real" price signals to exist. Etc. Etc. The employment of common sense does not require any further complicated examination that merely pointing out a dozen large factors such as these.

Oil as a pure expression of inflation encounters so many "complications" at the contemporary ground level, that it should be clear even to any inquisitive and agnostic economic neophyte that the theory needs to be more complex than that. Paul Van Eeden ultimately belongs to the "purist" school on this question. I consider their viewpoint misleading in our present era, particularly as it declines to investigate all these factors as we move into Peak Cheap Oil.

These people remain incurious as to this dynamic. In effect they are saying, "well, I'll start to study that when I see it becoming really large", only they underestimate the extent to which it is "large" already.