The financial media is awash with articles about inflation and rising oil prices. All you have to do is go over to Zero Hedge and there are about four or five running simultaneously. Here’s Graham Summers (the italics are mine):
The single most critical issue to note right now is the US Dollar’s collapse. (He says, breathlessly!)The US Dollar has broken below its multi-year trendline in a BIG way. Any hope of a bull market run is pretty much over and we’re on our way to a MASSIVE currency devaluation. (Oh woe!)
Graham thinks all the drug dealers in the world are going to start trading in gold and silver. Fat chance of that. How about the Japanese yen? Sorry, not enough of them and as Japan sinks deeper into deflation those yens will become more valuable and harder to find. How about the euro? Blessed with a pending short- term interest rate hike courtesy of the ECB and its outgoing chief cook and bottle washer Jean- Claude Trichet, the euro seems poised to take the dollar’s place in the Pantheon of reserve currencies and relegate the pathetic buck to the trash bin of history!
Crack dealers might have problems w/ gold but not with euros, right?
Hyperinflation; stores take euros in Wisconsin, don’t they? I mean, peeps sell their worthless dollars for whatever currency they can buy on the street, right? How about Mexican pesos? Who is actually pricing dollars? Currency traders … and motorists! When you buy gasoline you set the value of the dollar by way of the refinery and the oil producer. The apparent shortage of crude forces the dollar value lower and the crash that results from high crude prices will force the dollar value higher again.
We are on the downswing of dollar value relative to crude so the dollar bears are on a rampage. Once the crude price declines the dollar bears will vanish.
Both inflation and deflation are value relationships between money and output. In this world we want valuable production and business activities and worthless money. Money should have so little value that we voluntarily trade it for output. When the euro increases in value it suggests that the European business activities are losing value. Austerity starves business of customers and the Establishment of revenues. It is more profitable to hold money than it is to do business.
At some point the usual self-reinforcing cycle kicks in: increased money value leads to hoarding which adds a scarcity premium to the cash remaining in circulation which pushes the value of cash higher still leading to more hoarding, et cetera, et cetera, etc. Welcome to 1931.
This is already happening in a big way in the EU as elites wring their not- so- elite brethren dry with tight money and robust ‘banks- first’ policies.
We don’t have that crap in the United States of America! We have easy money and a robust ‘banks- first’ policy. The easy money is what everyone focuses on rather than the policies. This is idiotic because a banks- first policy like refusing to raise the Federal debt ceiling will torpedo the banks. first.
Maybe, that’s what that means …
Oil, Gold Rise And Silver Surges To Record On MENA Contagion And Greenspan’s “Faulty” Fiat Currency ConcernsTyler Durden/ GoldCore
Concerns about Libya, Saudi Arabia and the Middle East and North Africa continue to dominate markets. There are growing concerns of contagion and oil supply disruptions from the region. Oil and gold have risen and silver for immediate delivery surged another 2.3% after climbing to $36.5375, the highest price since Feb. 14, 1980 when silver reached a it’s nominal high $50.35.
Oil (WTI) rose 6.7% last week and contributed to silver rising 6.94% and gold rising by 1.33%. These gains have been added to again this morning. Growing concerns that surging oil prices will lead to further inflation and snuff out the already tentative global recovery will lead to continuing safe haven demand which will support the precious metals on dips.
Currency debasement on a scale never seen before in modern history continues in the U.S. and other countries. This is leading to a real risk of stagflation and possible even hyperinflation if sane monetary policies are not returned to soon.
So it goes: a few minutes online can gain a feel for the rockin’ zeitgeist of currency debauchery. Keep in mind, when everyone is on one side of the boat it will capsize. I think the smart money has been in dollars all along. The ‘short- dollar’ trade is a sucker’s play. Indeed, priced in crude the dollar is worth less than it was in the Spring of 2009 when crude could be had for $32 per barrel. The US was facing a complete meltdown at the time and demand was shell- shocked. Now, we have ‘recovery’: regardless of whether it is real or fake the oil piper must be paid.
When the oil price is high enough the markets will crash, the boat will capsize and Mr Shell- Shock will be back.
The articles pimping inflation and fuel prices is timely and informative; the fact of the articles themselves rather than their content.
Indeed, prices are rising now but at what point do the rising prices ration demand? Arguably far lower than the current price; momentum in markets and the desire of businesses to force themselves along ‘until things improve’ keeps the machine running. Nobody on the planet wants an economic collapse. Six billions working with desperation has some effect!
The world’s economies cannot endure extremely high prices for more than a few months. Prices are set by the amount of available credit at any given time. Keep in mind that the period before the current spike had businesses constrained by tight credit. Markets in general are saturated with legacy debts and finance has been unwilling to lend for this reason. Businesses have been unwilling to borrow more because of reasonable doubt about their own ability to carry more debt.
It is this perceived ability of debtors to service debts that restrains credit. Finance — not the government or the Fed — emits all the credit it desires and does so whenever it feels it is safe or necessary to do so.
Comes now a necessary input that has more than tripled in price in 24 months from $32 to $116 per barrel. There is a mad scramble for more credit which is the instrument to gain oil regardless of the asking price. It is also the instrument to bid the price higher. A higher oil price allows greater collateral value to attach to it which leads to more demand for credit which bids the price higher still requiring even more credit in a vicious cycle.
This added credit cannot be serviced as output from a barrel of oil has not changed. $110 oil produces the same amounts of goods and services as does $50 oil.
Uh oh! See the problem?
The increase in price is simply a tax, an allocation of output toward producers and middlemen. With physical peak oil production at hand, the high prices fail to bring more oil onto the markets. Instead, the high prices add to aggregate demand, enabling more consumption in producer states. This in turn leads to shrinking exports.
High oil prices also amplify producer country inflation which leads to unrest as the price of food and other necessities gallops away from the proletarians’ ability to pay. Unrest triggers oil supply uncertainty leading to even higher prices and more inflation in yet another self- reinforcing positive feedback loop.
It is the effect of prices on the credit markets — not the pump price — where economic damage is done. At some point the demand for credit pushes its cost beyond the level that business returns can support. Alongside a shortage of affordable crude there becomes a shortage of affordable credit. This wracks the banks which lend long after borrowing short — and a money panic begins.
This is what took place beginning in 2007, when an inverse yield curve in effect starved banks of cheap working capital. Hedge funds liquidated positions in (shadow) credit markets then poured returns into crude contracts to compensate for massive losses the credit- crude arbitrage generated. We all know how that turned out: absent the cheap credit finance teetered on the lip of collapse.
Understand that all finance markets are to some degree credit/margin markets that what is bought and sold is margin. High oil prices compete directly with finance for margin.
Once credit becomes too expensive there is revulsion and the credit vanishes along with the fuel bid. Collateral value collapses as it is an illusion in the first place.
At that point the debt in all the markets becomes collateral- free and the margin calls begin. In 2008 the Fed kept the margin markets from crashing by spewing $13 trillion into these markets. This effected a little more than 10% of the estimated total of dollar-denominated debt ‘in play’.
By doing so, the Fed exhausted its credibility, it cannot rescue the markets again. This is the back story of all the inflationists’ articles: the loss of the Federal Reserve’s relevance. As short rates rise around the world it will be hard for the Fed to defend its zero interest rate policy. The Fed cannot lend short @ zero percent to everyone on Planet Earth … which is what it is trying to do now. Interconnected finance reacts to spiking interbank rates in the EU and China and ignores the Fed. Yields are rising outside the reach of Bernanke’s administrative control. Rising 10 year yields fatally undermine the mortgage and housing markets. Losses to banks in housing market cancel any gains to banks from easy money,
Only the fear of a crash and a ‘flight to quality’ (whatever that means) keeps funds flowing toward debt and away from crude oil and other commodities.
The Fed’s easy money approach is a failure.. Any medicine the Fed can provide produces diminishing returns because it is the same medicine that caused the problems in the first place!
Credit = credible: what the Fed sells is the pop- culture progress narrative that everything is going to be fine tomorrow. Looking @ WW III getting ready to start and Peak Oil coming out of the closet like the boogeyman, things are not going to be fine tomorrow.
Meanwhile, the debt is real as a heart attack and the next deleveraging leg will not be soothed away. Once begun there will be no end to it because there is insufficient real, output to support more than a small amount of the debt exposure. What our economy ‘produces’ is consumption … waste. At the same time, America’s consumers are on the hook for the accumulated debt.
The credit can has been kicked down the road for decades. High oil prices signal the imminent end of the road.
The inflationistas and dollar bears ignore the mountain of debt. Their idea is that dollar value will continue to shrink indefinitely without causing effects anywhere in the economy other than the loss of relative purchasing power. This wrong because the dollar can only shrink so far before the price of fuel becomes unaffordable. When that happens the debt mountain becomes unaffordable as well. The zeitgeist leaps in a heartbeat from pricing of dollars in crude to pricing dollars in debt.
Sans- output the debt in dollars is worthless … which makes the dollar infinitely valuable.
Make no mistake about it our consumption- based ‘wealth’ is a fraud dependent upon a shared suspension of disbelief. Meanwhile, our debts are actionable leading to the loss of liberty.
Waste/wishful thinking versus binding contracts/loss of liberty. OUCH!
Keep this in mind about inflation. The binding contracts/loss of liberty does not suggest that creditors will sit quietly and allow what is due them to evaporate or be ‘inflated away’. The $50 trillion in outstanding US public and private debt are rich persons’ assets and these will not go silently into anyone’s good night. The same establishment that owns the debts also owns the central banks. It will tell the Fed to ape the ECB, cut back on the easy money and focus on the robust ‘banks-first’ policy.
This means deflation along with the fuel-credit dynamic which is out of the Establishment’s reach.