September 06, 2010
German Military Study Warns On Peak Oil

An internal study on the approach of Peak Oil done by the military of Germany (which was not supposed to see the light of day) shows the German military expecting drastic changes in the international order as a result of Peak Oil.

The issue is so politically explosive that it's remarkable when an institution like the Bundeswehr, the German military, uses the term "peak oil" at all. But a military study currently circulating on the German blogosphere goes even further.

The study is a product of the Future Analysis department of the Bundeswehr Transformation Center, a think tank tasked with fixing a direction for the German military. The team of authors, led by Lieutenant Colonel Thomas Will, uses sometimes-dramatic language to depict the consequences of an irreversible depletion of raw materials. It warns of shifts in the global balance of power, of the formation of new relationships based on interdependency, of a decline in importance of the western industrial nations, of the "total collapse of the markets" and of serious political and economic crises.

The report authors foresee a future where despotic oil producing nations dictate foreign policy to oil importers. The authors worry about extremist political movements. Financial panics are probably an even stronger possibility. An extended period of economic contraction much more severe than the last few years will send many more banks into bankruptcy.

My advice: Next time you buy a car make it a hybrid. Next time you move or change jobs choose a location that cuts the length of your commute. But the cost of gasoline is not the chief problem we individually face as we head into a period of shrinking oil availability. No, our biggest challenge will be to stay gainfully employed at jobs which pay comparable to our current salaries. Given enough buying power you can deal with what's coming. Without the cash life becomes much more difficult and stressful.

Robert Rapier has more on the German report.

The Guardian suggests the UK government is also secretly concerned about Peak Oil.

Speculation that government ministers are far more concerned about a future supply crunch than they have admitted has been fuelled by the revelation that they are canvassing views from industry and the scientific community about "peak oil".

The Department of Energy and Climate Change (DECC) is also refusing to hand over policy documents about "peak oil" – the point at which oil production reaches its maximum and then declines – under the Freedom of Information (FoI) Act, despite releasing others in which it admits "secrecy around the topic is probably not good".

A UK industry group including billionaire Richard Branson already believes Peak Oil is close.

London, 10 February, 2010: A group of leading business people today call for urgent action to prepare the UK for Peak Oil. The second report of the UK Industry Taskforce on Peak Oil and Energy Security (ITPOES) finds that oil shortages, insecurity of supply and price volatility will destabilise economic, political and social activity potentially by 2015. Peak Oil refers to the point where the highest practicable rate of global oil production has been achieved and from which future levels of production will either plateau, or begin to diminish. This means an end to the era of cheap oil.

Update: If you are thinking passenger rail has a big role to play in adapting to Peak Oil then think again. Reihan Salam points to rail industry concerns that high speed passenger rail would displace as much as 6 times as much freight rail trains. Given that trucks use about 10 times as much oil as trains for hauling freight it probably makes more sense to shift more freight to rail rather than more passengers.

Share |      Randall Parker, 2010 September 06 11:05 AM  Energy Peak Oil Adaptations


Comments
WJ Alden said at September 6, 2010 12:41 PM:

At what point does shale oil, such as the estimated 1.5 trillion barrels in the Green River Formation in Utah and Colorado, come into play? At what point does the cost of production become economically viable?

PacRim Jim said at September 6, 2010 3:24 PM:

It's a race. Will Germany become dependent on Muslim states before or after Muslims control the government. Ich weiss nicht.

Nick G said at September 6, 2010 3:25 PM:

This does not look like an independent, authoritative study. It's a literature search of possible risks, some of which are pretty flaky. It doesn't appear to be edited, so it appears to be a very early draft. For instance, the coverage of transportation needs to be greatly expanded - the idea that electric transportation doesn't exist is remarkably unrealistic - there are both electric trucks and rail (rail is obviously better for long distances), and water shipping can and will move away from oil.

Further, military agencies have a stake in scare-mongering. The US military has never issued a report that concludes, "Well, threats are lower and fewer, there is less need for military outlays." I know little of the German military, but would it be a surprise if they are making a bid for greater German "preparedness."?

On a practical note: they need to light a fire under the move to standardize and expand rail in Europe, which is moving very slowly at the moment. Right now trucks carry the majority of European freight, unlike the US. That and moving beyond diesel to EREV/EVs would allow the elimination of most oil imports.

It's time for Europe to kick it's oil addiction, as it is for the US.

cancer_man said at September 6, 2010 6:05 PM:

Whoa... if these militaries are predicting dire consequences due to peak oil, we better spend a lot more money on the military to ensure social stability.

You are such a sucker on this issue, Randall.

Randall Parker said at September 6, 2010 6:31 PM:

cancer_man,

No, I think that would be a waste of money. Why do you propose such a crazy idea?

Dave in Seattle said at September 6, 2010 7:12 PM:

The mileage of hybrids is nothing special. Clean diesels, natural gas vehicles and electric bikes will do better. The cheapest way to reduce future fuel consumption is to end immigration of course.

Jerry Maritnson said at September 6, 2010 8:21 PM:

I just hope we don't keep throwing money down the inter-city high-speed rail rathole in a well-intentioned but misguided effort to reduce dependency on foreign oil. I'm absolutely disgusted with what's happening in California with the likely destruction of some important urban freight rail lines to make way for the so-called "high-speed" mass transit rail corridors. For those outside the area, not only is their the big statewide project but there's also a multibillion dollar project to extend BART from Oakland down to the San Jose flea market area and my understanding is that most of this will require destroying some freight lines. Very few people will take the SFLA train as it will be far slower than what a turboprop can do since the train will have to go through the steep grades of the Pacheco pass and way east through Fresno in the segment between the bay area and LA. I doubt it will be door-to-door faster than a car for 90% of the commutes and will be much more expensive than a bus. My children will be burdened with this white elephant for decades.

The state would be far better off if the stimulus money was spent on 5 other things instead:
1. Electrification of dreyage at the port of Oakland & Longbeach. This is an easy way to cut urban emissions from diesel.
2. Improvement in the freight rail linkage between the ports and major distribution centers throughout the area.
3. Improvements in the "salad bowl express" times. Often fresh produce from California moves at about 15MPH by rail to get to the east coast markets by train and it could average 60MPH if there was some double tracking, better hump yard/intermodal centers, and better cooperation between the big 4 rail carriers. The cooperation could be forced by the gov't in exchange for subsidizing the double-tracking & rail yard improvements. This would increase the market value of CA produce and vastly decrease the amount of produce that gets sent by truck and even air.
4. Electrification of a few of the existing passenger rail corridors that have high ridership (i.e. Caltain baby bullet rush hour).
5. Incremental improvements to the bus-rapid-transit lines such as signal timing and jump lanes

Sione said at September 7, 2010 12:38 AM:

Yes indeed! The German military was never supposed to see the light of day again!

Sione

cancer_man said at September 7, 2010 6:05 AM:

Randall,

It was a touch of sarcasm. The militaries are implicitly proposing it. Any enemies left but terrorism and "Red China"? Maybe an vague threat of global anarchy is a good reason to keep defense budgets high, right?

xd said at September 7, 2010 9:11 AM:

I concur with the poster who stated that the military has an agenda for an enhanced budget.
Not that there are no risks.
We don't for example know what the decline rate is compared to the uptake rate of substitutes.
For example: In order to make a dent if we assume a 2% decline rate then we need to match that by replacing equivalent to 2% of the oil usage. We can get increased bang for the buck by electrification because it's up to 4X more efficient. So that means we only need 0.5% of the equivalent daily barrels of oil in electrical generating capacity to do it. We are building at that rate in gen cap but in terms of vehicles we're not so lucky. Even though we get a break on the gen cap we still need to replace the 2% of the fleet. I make that in North America to be 4 million vehicles every year. Given that right now the production capacity is about 20,000 leafs, 100,000 priuses and 500 volts we're short. Can we get to a North American production capacity of 4 million alt-fuel vehicles per year? I think we could do it with a push but we're not there yet, so it may take another oil price spike before we wake up or else a lot of people will be taking the bus.

Sione said at September 7, 2010 9:23 AM:

cancer_man

Quite right!

By the way, is it so that the US military spend has doubled since the demise of the USSR and the end of the Cold War? More than doubled if the bills for the invasions of Iraq and Afghanistan are included? More yet if the spend on mercenaries, quasi-military/security contractors et al, military retirees and escalating veteran health care is included? Could the spend be over US$ 1 trillion annually? Or is it more?

Goodness, gracious, social stability is costly. Still, the World has been saved for democracy.

Sione

Sione said at September 7, 2010 12:03 PM:

xd

What's with the "we" this and "we" that and "we" the other thing. Always remember, you speak only for yourself. Better if you thought "me". Better if you acted on what you thought, rather than talking.

Consider, if your analysis is that "a lot of people are going to be taking the bus" when the next oil price spike occurs, shouldn't you be taking steps to ensure that you are not one of them? Shouldn't you be preparing your affairs to take advantage of the opportunities that are looming, rather than waiting passively to be overtaken by events? Instead of worrying about what you think everyone else should be doing, why not do something for yourself? For instance, you could arrange to purchase an electric car or a hybrid or a bicycle etc. If you take your analysis seriously, then surely you'd act on it.

Sione

J said at September 7, 2010 12:04 PM:

First, this is not a comment on the likelihood or lack thereof of peak oil occuring.

As described in the article, this sounds like a pretty standard contingency planning document. The US military pays people to think up all sorts of scenarios and study the best way to handle them, and I would assume other countries do likewise. I'm sure we have contingency plans to repel an attack from Canada and/or Mexico, or for how to handle an invasion of Hawaii or our Pacific territories by, say, Indonesia. That doesn't mean these things are, or that the military agencies commissioning the studies believe they are even remotely likely to occur, only that somebody said "what if" and did a study.

Bruce said at September 7, 2010 2:32 PM:

Just be glad the Democrats have labelled oil from the Alberta Tar Sands "dirty oil". That will ensure maximum vulnerability for the USA.

China will be ecstatic if Alberta builds a pipeline to the west coast to sell that dirty oil to asia.

http://www.nationalpost.com/most_popular/story.html?id=610810

cancer_man said at September 7, 2010 2:48 PM:

I'm pretty sure that the US military had a report that was a clear warning of anarchy due to the effects of global warming or peak oil. I can't remember the name of that, though. This isn't the same thing as preparing for a possible moose invasion from the north.

Wolf-Dog said at September 7, 2010 9:20 PM:

If the US government launches a Manhattan Project for battery research and battery charging infrastructure (of the financial scale of the absurd war that started in 2001), then there should be no doubt that by 2010 we can electrify most of the cars and trucks with economically competitive cost. If you take into account the elimination of the imported oil component of the trade deficit, this is a winning solution.

Sione said at September 8, 2010 12:17 PM:

Wolf-Dog

It is 2010 already. There is no way that "we" (whoever that may refer to) can economically and competitively electrify most cars and trucks, let alone create the necessary infrastructure- not this year and likely not in a decade.

Anyway, where is all the money for the new "Manhattan Project" going to come from? Who pays? The US government is insolvent. Most US subjects are insolvent (or very close to it). So who is going to pay? The Chinese? Don't count on it.

The USA is facing far more serious threats than oil alone sad to say.

Sione

Nick G said at September 8, 2010 1:47 PM:

We don't have to electrify most cars and trucks to make a big impact: some cars are used a lot more than others (20% of Tokyo VMT comes from 2% of the vehicles) and truck freight can go to rail (which is a lot easier to expand on existing right of way).

Ken3331 said at September 8, 2010 2:07 PM:

Cost of extraction is one consideration, but even more important is how many barrels of oil it takes to extract a barrel. When you reach the 1:1 ratio, it makes more sense to just leave it in the ground.

g3 said at September 8, 2010 4:26 PM:

Cancer_man, the US-produced report was commissioned for the DOE, published in 2005, and is known as the Hirsch Report - http://en.wikipedia.org/wiki/Hirsch_report

Personally, I don't take this stuff lightly. It doesn't read like fluff:

"The peaking of world oil production presents the U.S. and the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking."

Many of the same points are echoed by the German group.

Both reports are worth a read, with an open mind, for sure.

Sione said at September 8, 2010 5:26 PM:

g3

The World is indeed presented with an unprecedented problem. The cause of the problems presently being experienced are political. The results are being encountered throughout the economic system in yet anouther example of government failure, the externality costs of which you are about to bear (I assume you are a subject of the USA).

Whether or not the production rate of oil peaks is not a fundamental. The rate of oil production is not causal. It is a result.

Consider, despite what E-P would assert the US dollar has declined ~80% in value since 1999. Since the creation of the Federal Reserve Bank of NY in 1913 the US dollar lost some 98% of its purchasing power against gold. The Dow Jones is down over 80% compared to gold since 1999. These results are indicative of an accelerating economic catastrophe. Oil producers will respond to economic signals as they must. So too, will consumers... eventually.

What you can expect next.
Real unemployment presently at 22% (in the US). It will increase.
The US budget deficit will increase dramatically. In very few years the interest repayment component of Federal debt is likely to be higher than total tax revenues. It's like Greece version 2 (only don't expect the Krauts to bail the US out- they can't!). Expect lots of inflation. Beware a US sovereign debt bubble collapse.
None of the fundamental problems in the banking sector (central banking, fiat money, fractional reserve banking) have been addressed let alone solved. They have been hidden by the politically expedient fraud of phoney-baloney valuations (in other words, bullshit) of titanic unrepayable and unrecoverable debts. All of this being enabled by government. The costs of all this are beginning to fall due. Enjoy the austerity to come!
The ~$20 trillion pumped into the world economy to "save" the financial system during 2008 &2009 have failed to solve much of anything. They have succeeded only in delaying the inevitable. Naturally enough, all the costs must be bourne by someone eventually. It aint going to be some Chinese peasant. It won't be a Samoan villager. Unlikely to be a West Australian miner.

Oil is but a flea bite compared to the jaws of the hungry 875lb Queensland crocodile waiting in your bed. Sleep well & sweet dreams!

Sione

cancer_man said at September 8, 2010 6:39 PM:

The Hirsch Report...

I just heard an interview with Hirsch (is he about 75 years old now?) and when asked about something he got wrong he said "I don't make predictions" Hilarious. He predicted that the peak would be sharp and instead reached a plateau.

The IEA is a complete joke. It is a political body that doesn't understand either technology or science. If so, how could they predict in 2005 that there will be no major technological advances in any energy area out to 2030? (The Hirsch report implicitly says the same thing as they linearly extrapolate oil demand to 2025.) They don't understand basic pricing so talk about imaginary "demand outstripping supply" just as randall, who *still* doesn't understand this, does.

Remember the IEA warning in 2007 that peak oik will cause "the rails to come off the world economy in 2012"? Anyone think that now? My guess is that Randall will say "they were off with the timing but..." But they have been "off with the timing" since the 1970s.

Goldman Sachs predicted $200 barrel oil for 2009. It went to $50 and has been around $75 in 2010.

Tierrny , who writes for the NY Times just one a $5000 bet against a guy who thought in 2005 that $200/barrel oil was coming for 2010.

Oh, he must have meant 2013! Ad nauseum.

Wolf-Dog said at September 8, 2010 8:55 PM:

Sione,

Sorry it was a typographical error of course, I meant 2020 not 2010. Incidentally by 2020 Denmark and Israel will have completely installed their electric car charging infrastructure in every street and they expect to close most of gas stations by 2020.

Only half the money we are losing every year in Iraq and Afghanistan (per year) would be enough to make significant progress in developing viable batteries.

It is calculated that putting charging pods in every street in the US would cost only about 1 year of imported oil. The issue is to develop batteries. Is it so far-fetched that we cannot build pure electric cars with 250 mile range for less than $25,000 by the year 2020 if the government injects $100 billion per year for the next 10 years until 2020? If the decision is made, this money can be found, given how much we are wasting elsewhere. Just the foreign trade deficit (oil component) reduction would pay for the initially higher price of cars as a country.

Sione said at September 9, 2010 1:41 AM:

Hi Wolf-Dog

2010, 2020. Same deal. Even Honda does not expect the ICE to be replaced within a ten year time frame. Indeed they expect ICE to remain the prefered prime mover well beyond 2020. Barring unforeseen circumstance it is difficult to disagree with their analysis.

Israel only exists so long as the US props it up. As soon as the US can't do that Israel disappears into history. Similarly Denmark is propped up through mechanisms of the EU. As soon as Germany stops shouldering the burden of the Euro it's over, bright red rover. If the governments of Israel and Denmark are seriously considering implementation of what you report, it is important to understand that the wealth they intend to consume for the purpose is ultimately sourced from other countries via an international welfare mechanism (with all the corruption and wastage that comes with). Such mechanisms are unsustainable for both client state (Israel, Denmark) and imperium (USA, Germany/France).

The US military spend has more than doubled since the end of the Cold War. Still the military spend is unlikely to be reduced until the Federal Govt taps out every red cent of credit it can emburden its subjects with (they play, you pay). In the meantime it is difficult to consider seriously the possiblilty that anything like the amount of money you mention would be diverted to the project you propose (and even if it was there is no guarantee that the stated result sought would be attained- very likely it wouldn't be). All the money has been already promised elsewhere- whether for baby boomer retirement, social security, medicare, obamacare, bail-outs (yes, there are more yet to be demanded), new wars, financial rescue of bankrupted states and municipalities, expansion of the Fed balance sheet, "purchase" of toxic liabilities, drugs, continued nationalisations, "security", foreign adventures, etc. etc. etc.

Substitution of one collection of govt failures for another is not going to alter much, merely continue an acceleration of the on-going reduction of the living standards of people in the USA.

You ask whether it is far-fetched that pure electric cars with 250 mile range can be built for less than $25,000? The answer is yes. Not entirely impossible but most unlikely. Further, if the govt creates a welfare boon-doggle by borrowing and consuming yet another $100 billion per year of money it doesn't have for the next 10 years, then the goal becomes impossible to attain.

Sione

Chris T said at September 9, 2010 8:50 AM:

"The US military spend has more than doubled since the end of the Cold War."

This is true, but the better measure is spending versus GDP because of economic growth. At 4.7% it's still below Cold War spending in 1989 (5.59%). Our debt is due to massive spending growth in other areas.

Sione said at September 9, 2010 1:17 PM:

Chris T

The official GDP numbers are not reliable and hence not worth employing for the purposes of analysis since they are corrupted to the point of fraud.

Quoting from a recent essay by Chris Martenson (see his "crash course" at, http://www.chrismartenson.com/crashcourse ).

"Gross Domestic Product, or GDP, is how we tell ourselves that our economy is either doing well or doing poorly. In theory, the GDP is the sum total of all value-added transactions within our country in any given year.

Here’s an example, though, of how far from reality GDP has strayed. The reported number for 2003 was a GDP of $11 trillion, implying that $11 trillion of money-based, value-added economic transactions had occurred.

However, nothing of the sort happened.

First, that 11 trillion included $1.6 trillion of imputations, where it was assumed that economic value had been created but no actual transactions took place.

The largest of these imputations was the “value” that the owner of a house receives by not having to pay themselves rent. Get that? If you own your house free and clear, the government adds how much they think you should be paying yourself rent to live there and adds that amount to the GDP.

Another is the benefit you receive from the “free checking” provided by your bank, which is imputed to have a value, because if it weren’t free, then you’d have to pay for it. So that value is guesstimated and added to the GDP as well. Together, just these two imputations add up to over a trillion dollars of our reported GDP.

Next, the GDP has many elements that are hedonically adjusted. For instance, computers are hedonically adjusted to account for the idea that, because they are faster and more feature-rich than in past years, they must be more additive to our economic output.

So if a thousand dollar computer were sold, it would be recorded as contributing more than a thousand dollars to the GDP. Of course, that extra money is fictitious, in the sense that it never traded hands and doesn’t exist.

What’s interesting is that for the purposes of inflation measurements, hedonic adjustments are used to reduce the apparent price of computers, but for GDP calculations, hedonic adjustments are used to boost their apparent price. Hedonics, therefore, are used to maneuver prices higher or lower, depending on which outcome makes thing look more favorable.

So what were the total hedonic adjustments in 2003? An additional, whopping $2.3 trillion. Taken together, these mean that $3.9 trillion, or fully 35% of our reported GDP, was NOT BASED on transactions that you could witness, record, or touch. They were guessed at, modeled, or imputed, but they did not show up in any bank accounts, because no cash ever changed hands.

As an aside, when you hear people say things like “our debt to GDP is still quite low” or “income taxes as a percentage of GDP are historically low,” it’s important to remember that because GDP is artificially high, any ratio where GDP is the denominator will be artificially low."

--

Conclusion: the ratio you recommended (military spending versus GDP) is inaccurate and misleading. It can't be relied on.

By the way, the US debt INCLUDES the on-going, accelerating and enormous drain of military spending.

Given the state of the US debt situation, is doubling the military spend logical? Do you believe that such contributions to the creation of historically unprecedented levels of international debt provide enhanced safety for people living in the USA?

Sione

Bruce said at September 9, 2010 1:29 PM:

Sione: "Israel only exists so long as the US props it up. As soon as the US can't do that Israel disappears into history."

As soon as the US stops supporting Israel, and the Arab countries try to conquer Israel, Israel will nuke all its neighbors and steal their oil. Thats when Peak Oil will occur. It will be too radioactive to be any use.

Chris T said at September 9, 2010 3:44 PM:

I was not aware of economic imputation, but after doing some reading I'm a lot less dismissive than you are.

The largest of these imputations was the “value” that the owner of a house receives by not having to pay themselves rent.

This actually makes a lot of sense. If a renter buys the home they're living in, GDP would go down in later years without imputations even though the home was being used for the same purpose. This makes no logical sense and could lead to bizarre swings in GDP from year to year.

Another is the benefit you receive from the “free checking” provided by your bank, which is imputed to have a value, because if it weren’t free, then you’d have to pay for it. So that value is guesstimated and added to the GDP as well. Together, just these two imputations add up to over a trillion dollars of our reported GDP.

This isn't guesstimated; it's based on the value you would have received if you held government securities minus the bank's interest rate and is counteracted by subtracting out the value the bank would have earned by buying securities with the deposits instead of lending it at higher interest rates.

Next, the GDP has many elements that are hedonically adjusted. For instance, computers are hedonically adjusted to account for the idea that, because they are faster and more feature-rich than in past years, they must be more additive to our economic output.

Hedonics is actually based on changes in quality over time and also makes a good deal of sense. It's an attempt to keep what's being compared in CPI (which it's primarily used for) somewhat constant over time. After all, consumers don't buy computers just to own a computer, they buy it to do things. ie: if I bought a 100 GB hard drive one year for $100 and bought a 500 GB in a later year for the same amount, not accounting for the fact that the later HD holds the same amount as 5 earlier HDs would lead to highly misleading statistics.

the ratio you recommended (military spending versus GDP) is inaccurate and misleading. It can't be relied on.

Then what would you recommend? Comparing absolute values doesn't work because the economic resources of the United States have changed over time.

By the way, the US debt INCLUDES the on-going, accelerating and enormous drain of military spending.

Technically it could include anything in the Federal budget. Saying this or that caused our large debt is meaningless because it can also be said that cutting this or that (or raising taxes) would have prevented it.

Given the state of the US debt situation, is doubling the military spend logical? Do you believe that such contributions to the creation of historically unprecedented levels of international debt provide enhanced safety for people living in the USA?

I did not state my policy preferences. I was simply pointing out that the military has historically taken up a larger share of the economy and the amount spent on it is partially a function of us having more resources to put towards it.

Sione said at September 9, 2010 3:46 PM:

Bruce

Charming prediction! There are a few details to consider.

1/. As crude oil is located underground, would the discharge of nuclear weapons in the air, at ground level, or even at shallow depths, cause radioactive contamination of all Middle East crude oil?

2/. Israel has a limited quantity of nuclear weapons. Are all the surrounding states unaware of that? Would they each take the risk of Israeli initiation of nuclear attack by immediate commencement of military hostilities against Israel or would they allow economic reality to overtake Israel instead?

3/. Would Israeli politicians employ nuclear weapons knowing full well that the result would likely be a genocide of Israeli citizens in a frenzied hatred of retaliation or would they negotiate- seeking to manouevre within the realities of the economic, diplomatic, military and economic situation they were presented with?

4/. What would cause the collapse of US support for Israel? If the cause was economic, then isn't it likely that US oil consumption would be in decline anyway?

5/. Is it significant that the US military is the largest US consumer of oil products? What occurs when the government can no longer fund its military's oil consumption?

6/. Isn't the "peak oil" theory based on the ideology of a supposed inevitable resource depletion, as opposed to government actions & interference resulting in reductions in oil exploration, resource development and production?

How this could play out is unknown and your scenario is a (threatening) possibility. What is certain is that the present state of play is not going to persist indefinately.

Sione

Sione said at September 9, 2010 4:08 PM:

Bruce

One last question which is worth the time to consider.

7/. Given the consumptive seizure of wealth, resource and labour by government inevitably reduces what is left in the economy, isn't it to be expected that total savings, hence available investment funding for competitors to the status quo, is reduced?

Sione

Sione said at September 9, 2010 5:10 PM:

Hi Chris

Regarding imputation you write, "This actually makes a lot of sense. If a renter buys the home they're living in, GDP would go down in later years without imputations even though the home was being used for the same purpose. This makes no logical sense and could lead to bizarre swings in GDP from year to year."

It makes no sense unless deception is afoot!

If a renter buys the home they live in "GDP" does not "go down". The money the tenant previously directed to rental payments can now be directed elsewhere. He or she may now purchase other items instead or even (shock, horror) direct the money towards savings. How can this be a source of "bizarre swings"? Double counting redirected rent money isn't valid.

The imputation makes the economy appear to be larger and much more robust than it actually is.

You write, "This isn't guesstimated; it's based on the value you would have received if you held government securities minus the bank's interest rate and is counteracted by subtracting out the value the bank would have earned by buying securities with the deposits instead of lending it at higher interest rates."

The point to hold in mind is that this "value" is a fiction. "You would have received if" is not the same as what actually occured and was really measured. If these sorts of wild manipulations are supposedly valid, then it is equally valid for a person to argue that the value of free software, give aways, gifts and any other uncharged "services" represent an increase of trillions of dollars in GDP.

You write, "Hedonics is actually based on changes in quality over time and also makes a good deal of sense. It's an attempt to keep what's being compared in CPI (which it's primarily used for) somewhat constant over time. After all, consumers don't buy computers just to own a computer, they buy it to do things. ie: if I bought a 100 GB hard drive one year for $100 and bought a 500 GB in a later year for the same amount, not accounting for the fact that the later HD holds the same amount as 5 earlier HDs would lead to highly misleading statistics."

That line of reasoning is completely wrong. Reproduced below are a few further comments from the Chris Martenson essay, located at http://www.chrismartenson.com/crashcourse/chapter-16-fuzzy-number .

"As you now know, inflation is a matter of active policy. Too little and our current banking system risks failure. Too much and the majority of people noticeably lose their savings, which makes them politically restive. So keeping inflation at a "goldilocks" temperature – not too hot and not too cold – is the name of the game.

Inflation has two components. The first is the simple pressure on prices due to too much money floating around. The second component lies with people’s expectations of future inflation. If expectations are that inflation will be tame, they are said to be well-anchored. If people expect prices to rise, they tend to spend their money now, while the getting is still good, and this serves to fuel further inflation in a self-reinforcing manner. The faster people spend, the faster inflation rises. Zimbabwe is a perfect modern example of this dynamic in play.

Accordingly, official inflation policy has two components – the first is regulating the money supply and the second is anchoring your expectations.

And how exactly is this anchoring accomplished? Over time, this has evolved into little more than telling you that inflation is a bit lower, or even a lot lower, than it actually is.

The details of how this is done are more complicated but worthy of your attention. Let me be clear, the tricks and subversions we will examine did not arise with any particular administration or political party. Rather, they arose incrementally during every administration you care to examine over the past 40 years.

Under Kennedy, who disliked high unemployment numbers, a new classification was developed that scrubbed so-called ‘discouraged workers’ from the headline data, causing unemployment figures to drop.

Johnson created the “unified budget” that we currently enjoy, which rolls surplus Social Security funds into the general budget, where they are spent but then not reported as part of the deficit you read about.

Richard Nixon bequeathed us the so-called “core inflation” measure, which strips out food and fuel, which, as Barry Ritholtz says, is like reporting inflation ex-inflation, while it was Bill Clinton who left us with the current tangled statistical morass that is now our official method of inflation measurement.

At every turn, a new way of measuring and reporting was derived that invariably served to make things seem a bit rosier than they actually were. Economic activity was higher, inflation was lower (a lot lower), and jobs were more plentiful. Unfortunately, the cumulative impact of all this data manipulation is that our measurements no longer match reality. We are, in effect, telling ourselves lies, and these fibs serve to distort our decisions and jeopardize our economic future.

Let’s begin with inflation, which is reported to us by the Bureau of Labor Statistics, or BLS, in the form of the Consumer Price Index, or CPI.

If you were to measure inflation, you’d probably track the cost of a basket of goods from one year to the next, subtract the two, and measure the difference. And your method would, in fact, be the way inflation was officially measured right on up through the early 1980s.

But In 1996, Clinton implemented the Boskin Commission findings, which now have us measuring inflation using three oddities: substitution, weighting, and hedonics. To begin with this list, we no longer simply measure the cost of goods and services from one year to the next, because of something called the "substitution effect." Thanks to the Boskin Commission, it is now assumed that when the price of something rises, people will switch to something cheaper. So any time, say, that the price of salmon goes up too much, it is removed from the basket of goods and substituted with something cheaper, like hot dogs. By this methodology, the BLS says that food costs rose 4.1% from 2007 to 2008.

However according to the Farm Bureau, which does not do this and simply tracks the exact same shopping basket of thirty goods from one year to the next, food prices rose 11.3% over the past year, compared to the BLS which says they only rose 4.1%. That’s a huge difference. In my household, our experience is better matched by the Farm Bureau.

One impact of using substitution is that our measure of inflation no longer measures the cost of living, but the cost of survival.

Next, anything that rises too quickly in price is now subjected to so-called “geometric weighting,” in which goods and services that are rising most rapidly in price get a lower weighting in the CPI basket, under the assumption that people will use less of those things. Using the government’s own statistics from two different sources, we find that health care is about 17% of our total economy, but it is weighted as only 6% of the CPI basket.

Because healthcare costs are rising extremely rapidly, the impact of including a much smaller healthcare weighting is a reduction in reported inflation. By simply reinstating the actual level of healthcare spending, our reported CPI would be several percent higher.

But the most outlandish adjustment of them all goes by the name “hedonics,” the Greek root of which means “for the pleasure of.” This adjustment is supposed to adjust for quality improvements, especially those that lead to greater enjoyment or utility of the product, but it has been badly overused.

Here’s an example. Tim LaFleur is a commodity specialist for televisions at the Bureau of Labor Statistics, where the CPI is calculated. I’m guessing he works in a place that looks like this. In 2004, he noted that a 27-inch television selling for $329.99 was selling for the same price as last year, but was now equipped with a better screen. After taking this subjective improvement into account, he adjusted the price of the TV downwards by $135, concluding that the screen improvement was the same as if the price of the TV had fallen by 29%. The price reflected in the CPI was not the actual retail store cost of $329.99, which is what it would cost you to buy, but $195. Bingo! At the BLS, TeeVees cost less and inflation is heading down. At the store, they’re still selling for $329.99.

Hedonics are a one-way trip. If I get a new phone this year and it has some new buttons, the BLS will say the price has dropped. But if it only lasts eight months instead of 30 years, like my old phone, no adjustment will be made for that loss. In short, hedonics rests on the improbable assumption that new features are always beneficial and are synonymous with falling prices.

Over the years, the BLS has expanded the use of hedonic adjustments and now applies these adjustments to everything from DVDs, automobiles, washers, dryers, refrigerators, and even to college textbooks. Hedonics are now used to adjust as much as 46% of the total CPI.

What would happen if you were to strip out all the fuzzy statistical manipulations and calculate inflation like we used to do it? Luckily, John Williams of shadowstats.com has done exactly that, painstakingly following each statistical modification over time and reversing their effects.

If inflation were calculated today, the exact same way it was in the early 1980’s, Mr. Williams finds that it would be running at closer to 13% than the currently reported 5%. This is a stunning 8% difference, which explains much that we see around us. It explains why people have had to borrow more and save less – their real income was actually a lot lower than reported. A higher rate of inflation is consistent with weak labor markets and growing levels of debt. It fits the monetary growth data better. So many things that were difficult to explain under a low-inflation reading suddenly make sense.

The social cost to this self-deception is enormous. For starters, if inflation were calculated like it used to be, Social Security payments, whose increases are based on the CPI, would be 70% higher today than they actually are. Because Medicare increases are also tied to the CPI, hospitals are increasingly unable to balance their budgets, forcing many communities to lose services. These are real impacts."

Whie there are details of areas of economics I'd disagree with Chris about, he's explained these issues accessibly and clearly.

Fundamentally one is presented with a choice to either deal with what is real (what was actually and really measured) and what really occurred (or is occurring), or one massages the data to reflect one's premise, prejudices and biases. The latter is cart before horse stuff. Don't ever rely on it.


You ask, "Then what would you recommend? Comparing absolute values doesn't work because the economic resources of the United States have changed over time."

Comparing the real is the ONLY reliable approach to employ. If you are unable to compare like with like, then what you are undertaking is mere playing with pretty numbers. Fun in a recreational way, but in the end a waste of time if it is fact you seek to discover.

You write, "Technically it could include anything in the Federal budget."

It really is not a matter of a technicality, it is an actual. The military spend is a large part of the budget and hence, the debt.

And, "Saying this or that caused our large debt is meaningless"

The causes of the large Fed debt are not meaningless. They are real and important. What needs to be considered is what the valid purpose of government actually is (assuming there should be one at all), what that costs, how that should be funded and how govt could be restricted to those activities (assuming that's possible).

Continuing on, "because it can also be said that cutting this or that (or raising taxes) would have prevented it."

You are correct in suggesting that cutting spending would have reduced or prevented debt, as would draconian increases of taxation. Nothing meaningless in that. That would have been the honest thing to do...

In response to your final comment.
When I asked, "Given the state of the US debt situation, is doubling the military spend logical? Do you believe that such contributions to the creation of historically unprecedented levels of international debt provide enhanced safety for people living in the USA?" I wasn't implying I knew what your preferences were, I was asking the qustions in order to seek them.

Cheers

Sione

Chris T said at September 10, 2010 12:08 PM:

It makes no sense unless deception is afoot!

I'm cynical, but not THAT cynical. I guess the problem with the GDP adjustments comes in if you believe that there is a deliberate attempt to deceive and/or feel there is no basis for them. I hold neither position. You obviously hold both.

Thanks to the Boskin Commission, it is now assumed that when the price of something rises, people will switch to something cheaper.

This is actually based on basic economic reasoning. If prices rise and there is a cheaper alternative, people tend to switch to the cheaper alternative. Else we'd still be using wood in the CPI.

Comparing the real is the ONLY reliable approach to employ.

I highly disagree here. If you only compare real, you strip them of any context. ie: Traffic deaths are about where they were in 1950 in real terms. Just comparing real terms would lead one to believe that safety has not improved in 60 years. However, this would be incorrect because there are far more people driving and driving more miles. Vehicle safety has actually increased dramatically since 1950.

The causes of the large Fed debt are not meaningless.

The absolute cause is not meaningless - not matching expenditures to revenue, but attempting to pick out a specific program is more a matter of personal preference.

Personally I favor a strong military - peace through strength. The worst wars in history have generally been fought when there was no clearly dominant power. That said, defense spending has grown a bit faster than one would expect for an efficient military and development and procurement programs have been chronically over budget.

xd said at September 10, 2010 12:36 PM:

Sione ,

For someone who doesn't know my personal details *at all* you sure got me figured out (rolls eyes).

How do you know I haven't made any preps?

Think before opening your mouth

xd said at September 10, 2010 12:42 PM:

"Cost of extraction is one consideration, but even more important is how many barrels of oil it takes to extract a barrel. When you reach the 1:1 ratio, it makes more sense to just leave it in the ground."

That's hilarious that this old fallacy from the dieoff site is still being repeated from 1998.

First of all you don't need to use oil to get oil out. In fact most of the ground based pumps are gravity assist or electric. The oil rig based pumps are all electric and though in most cases they are powered by generators, they could quite easily be powered by nuke or wind.

But to spell it out for you so it's easy to see the flaw in the barrels of oil to get barrels of oil argument, the following:

As long as electricity is cheaper than oil and demand for oil is high enough, then even if it takes 10 barrels of oil energy equivalent to get one barrel of oil they'll still do it because it'll be worth more to get the oil out of the ground.

And given that we can build an effectively unlimited number of windmills not to mention nuke, solar and all the unconventional gas and coal lying around I doubt any economically viable oil will be left in the ground.

Timothy said at September 10, 2010 1:45 PM:

My weekly source of info on peak oil. I like their Monday summaries of what's going on worldwide in the oil industry:

Association for the Study of Peak Oil and Gas
http://www.aspo-usa.com/

Ellen said at September 10, 2010 1:50 PM:

At one time I had an issue of Popular Science, circa 1930. Inside was an article about peak oil being upon us. On the cover was a parabolic mirror concentrating sunlight to make steam, to replace the fuel we soon would lack.

We humans do love our impending catastrophes, don't we? Why, I remember back in the Sixties how we were imminently doomed to a new Ice Age. Somewhere in there, Japan was going to take over as THE global economic power. Right now we're worried about Global Warming. But gee, if we run out of oil we'll stop making CO-2, so maybe it won't be so bad.

mbabbitt said at September 10, 2010 1:56 PM:

More alarmism with politicians restricting exploration because of the greenies. I don't buy it. The talk of "addiction" is stupid talk. Oil is a great commodity; So much of our lives -- that we take for granted comes from it, directly or indirectly. Yes, I like comfort, medicine, cleanliness, longevity, entertainment, plentiful food -- all because of oil. Let's find more sources.

TMLutas said at September 10, 2010 2:08 PM:

The US military's solved peak oil for the US during the Bush administration. If oil starts getting too high (say above $8/gal), the president simply declares a national emergency, suspends the environmental regs, and we go to FT liquid fuels. During the Bush administration we already certified our entire military fleet that it can run on B50 fuel (50/50 FT/conventional). Any slow, gradual rise will see the private sector building the same plants for a profit but if things move fast (ie we find out one day a lot of people have been lying about available reserves) we can release oil from the SPR and have plants up under emergency regulations by the time we exhaust the SPR.

That's the beginning and ending of the national security implications domestically. Now what happens if the ME loses its largest generator of hard currency? That's a different issue.

jravin said at September 10, 2010 2:12 PM:

Ellen:

AMEN!

I remember reading the same crap in a Scientific American article about 1957 that said we (and the world?) would be out of oil by 1970. Hah!

This whole load of crap about "Peak Oil" is just another way for the self-anointed fools that run governments and their sycophants in academia and the media to maintain their control over society.

As someone above mentioned, there is about 1.5 Trillion bbl of oil in the shales in the Western US - about a 200 year supply for us.

There is about 4T barrels of tar under parts of Venezuela, which can also be extracted, albeit at a higher price, when Chavez is gone, if needed.

And very little of the world has been intensively explored...

Lakelevel said at September 10, 2010 2:53 PM:

What a lot of wasted conjecture, both here and in Germany. Peak oil is a politically created fantasy. Not just all that shale but all the giant coal deposits in the US would keep us in oil AT BELOW THE COST WE PAY TODAY for the next 400 years. But beware, all those bad things predicted by peak oil nuts could happen if we let these environmental wackos continue to run things.

cavan said at September 10, 2010 2:59 PM:

There is an estimated 1 trillion barrels of oil in oil shale (USA). America has coal reserves equal to all the oil reserves in the middle east. The germans in WWII made deisel fuel from coal.
There are an estimaterd trillion barrels of oil in Canada Tar sands. Mexico and Venezuela have huge deposits of oil in clay strata ( maybe a trillion barrels). The Usa has immense reserves of natural gas.
What about nuclear power?
This article is all flim flammery. It sounds like Jimmy Carter in the 70's.

Interested Conservative said at September 10, 2010 3:33 PM:

This is all well and good, but on a more serious note do any of these studies mention when the Cubs will win the World Series?

xd said at September 10, 2010 3:52 PM:

Peak oil is real in one sense:
It's a non-renewable resource and logic dictates that the volume of oil produced must lie under a production curve (of whatever shape) and that the amount of oil produced can never be greater than that shape.

What hubbert theory doesn't mention is that it's talking about the production curve taking ONLY current technology into account. The actual amount of oil sitting in the ground is much larger than that under a hubbert curve at any one point. In the real world this leads to reserves being stated upwards as new technology allows us to grab an ever greater percentage share of oil in place thus pushing any putative peak off or else flattening out a peak from a bell curve into a grand piano curve instead.

The church of peak oil dogma, however, reckons that only a perfectly formed bell curve is possible and that the reason reserves have been continually stated upwards is in fact due to OPEC lying for political reasons rather than technology.

A recent example would be stating that Canada has 300 billion barrels of reserves whereas ten years ago it only had 80 billion barrels.

Actually here in Alberta we are sitting on over a trillion barrels of oil in the ground just waiting on technology to pull it out. The technology exists: nuclear reactors.

Move along here nothing to see folks...

theBuckWheat said at September 10, 2010 4:13 PM:

"Peak Oil" is a mirage constructed by people who are hostile to the free market. Military vehicles, aircraft and ships burn products made by refining crude oil. What counts is the price. In a free market, the price is all that matters because if there is plenty supply, a sudden increase in demand will not drive the price up by very much. But more to the point, in a free market, the refiner is able to use whatever types of raw hydrocarbons that are the least costly to make the desired fuel. And we are AWASH in hydrocarbons that can be converted.

The Germans converted coal to make diesel and aviation fuel during WW II. The South Africans later used an improved version of that same process to make vehicle fuels during the world boycott of that country. Here in the US, we convert corn into a usable hydrocarbon fuel. We are working vigorously to get other sources such as algae and switch grass to a price point where it can compete against the present price of crude oil. A plant operated as a joint venture between Changing World Technologies, Inc. and ConAgra to convert the remains of processing Butterball turkeys into biodiesel fuel recently shut down because costs were just too high compared to other sources of this fuel. This same process was tested on sewage sludge and it was determined that if that source was economic to convert, there was enough sludge to replace all US oil imports. The key to conversion is not supply, but cost, cost and cost, that is if government will not obstruct or distort the economic decision-making by subsidies like it presently does with corn for ethanol.


"Peak Oil" is just a cheap trick to advance the usual liberal agenda of bigger government and reduced liberty. Same old crap in a new wrapper.

theBuckWheat said at September 10, 2010 4:16 PM:

Dr. Theodore K. Barna wrote a report for the Office of the Secretary of Defense, titled Clean Fuels Initiative. It shows that the US has more hydrocarbons in the form of oil, gas, coal and shale than all of Arab OPEC combined.

see:

http://www.pewclimate.org/docUploads/Harrison.pdf

jcm said at September 10, 2010 4:17 PM:

Send them a copy of Julien Simon; the Ultimate Resoursce II

theBuckWheat said at September 10, 2010 4:19 PM:

Beyond the conventional sources of hydrocarbons, there are methane hydrates. The USGS report states:

"The worldwide amounts of carbon bound in gas hydrates is conservatively estimated to total twice the amount of carbon to be found in all known fossil fuels on Earth.

This estimate is made with minimal information from U.S. Geological Survey (USGS) and other studies. Extraction of methane from hydrates could provide an enormous energy and petroleum feedstock resource. Additionally, conventional gas resources appear to be trapped beneath methane hydrate layers in ocean sediments. "

see report: http://marine.usgs.gov/fact-sheets/gas-hydrates/title.html

Iggy Farben said at September 10, 2010 5:56 PM:

The Germans were saying the same thing in 1933. Read The Wages of Destruction by Adam Tooze.

http://tinyurl.com/2e3aav8

rc said at September 10, 2010 7:09 PM:

My suspicion was piqued when the article said the Bundeswehr was: "a think tank tasked with fixing a direction for the German military." I immediately thought it was a special interest group. So I researched the group... although it turns out the group is indeed affiliated with the German ministry of defense.

BUT...

In the website details, you can learn the evolution and timeline as Bundeswehr changes from the long-storied center of analysis and simulation in 2003 to the Political Foundation of Let's Not Be Like George Bush.

In language, priority, emphasis, even location you can see this military analysis organization morph into a military policy organization. They even say explicitly that the center moved in 2004 to the political-military hub of the area, in order to more emphasize their policy role.

And if a bunch of hippies populated a new policy center in 2004, what do you think their conclusions are going to be? I bet a lot of hard scientists had to be laid off from Bundeswehr after its new turn. After all, how can military logistics simulations be used to Blame George Bush?

Lakelevel said at September 10, 2010 7:12 PM:

So since peak oil is a fabrication, maybe what the German military people were really saying was that if we keep left wing idiots in power then: "It warns of shifts in the global balance of power, of the formation of new relationships based on interdependency, of a decline in importance of the western industrial nations, of the "total collapse of the markets" and of serious political and economic crises." Pretty smart, those Germans.

Lakelevel said at September 10, 2010 7:27 PM:

So it all comes down to if man-made global warming is real. If not, all this goes away. No peak oil, no CAFE standards, no hundreds of other big and little things that have already made things more expensive and less useful. So you see why they can never give up their beliefs on Climage Change. No matter how much it is debunked, they have way too much invested in it to ever admit they were wrong. Because of this, the future is gonna get uglier before it gets better.

Lakelevel said at September 10, 2010 7:42 PM:

I should add, even if man-made global warming is real, no-one has ever shown anything like scientific proof that this would be a bad thing and we better do something about it. Why we are embarked on this mad path to bring down western civilization is the great mystery of our age.

Sean said at September 10, 2010 8:12 PM:

Natural Gas. New drilling techniques make it abundant for the U.S.

It wouldn't be painless but we could convert a lot of our transportation to it. That frees up millions of barrels a day for the middle east despots to keep selling to countries like Germany.

Until these new drilling techniques freed all that Nat Gas I was convinced Peak Oil was a game changer too. But it's not anymore.

Sione said at September 11, 2010 11:54 AM:

OK then, so what exactly is Peak Oil? What exactly is the term employed to describe? Is it the actual peak (day/month/year?) of crude oil extraction from the ground regardless of the reason/s for subsequent rate decline? Or, is the term solely employed in conjunction a theory of irreplaceable resouce depletion?

Sione

Randall Parker said at September 11, 2010 12:25 PM:

Lakelevel,

If Peak Oil is a fantasy why, during a period of high unemployment and lower economic activity, is oil trading for about $75 per barrel?

We've had high oil prices for almost a decade and yet oil production in 2010 is still below 2005. Why is that?

theBuckWheat,

Liberals are not embracing the Peak Oil theory. To describe it as part of the liberal agenda is at variance with the facts. The Democrats are not pushing Peak Oil as a theory. Very few in Congress state that Peak Oil is near. The biggest Peak Oil believer in the House is Republican Roscoe Bartlett.

Ellen,

You familiar with the story of the boy who cried wolf? Do you remember how the story turned out? The wolf finally came.

jcm,

Re-betting Ehrlich-Simon bet since 1993 would yield Paul Ehrlich as the winnner.

Sione said at September 11, 2010 12:47 PM:

xd

You ask how I know you havn't made preparation. Easy! Had you actually done anything substantive and real you'd have addressed the questions directly, describing what you had achieved by way of preparation, how you'd arranged your affairs, what you had set in place etc. Heck! Smart lad like you, surely you'd have welcomed the opportunity to elaborate, boast even, demonstrate your cleverness and knowledge and competance. Yet you didn't...

That's a tell (one of three you've thoughtlessly provided).

Learn to think before making an arse of yourself.

Sione


Sione said at September 11, 2010 1:34 PM:

Randall

"why, during a period of high unemployment and lower economic activity, is oil trading for about $75 per barrel?"

Oil is up when denominated in dollar terms because the value of the dollar has been severely eroded (loss of ~80% since 1999).

--

Worse news, presently there are trillions of dollars in "reserve" on account at the Fed. Eventually these too will enter general circulation. Commodity prices (including oil) will respond.

Even worse news, Bernanke (during a recent speach to Central bankers at Jackson Hole) confimed he intends to inflate further should the economy tank (which he also admitted it doing). Stay tuned. Commodity prices (including oil) will respond.

Even worse news than that, Obama's (different but no change) regime continues with record deficits, record debts, nationalisations of entire sectors of the US economy. Productivity is in a tailspin. US savings are all but tapped out. Looming liabilities (like social security, upcoming Fannie and Freddie bail-out reprise, various county and State bail-outs) remain unfunded, unable to be discharged since provision is lacking. What will be done about it? Hint: try that recent Jackson Hole speach for inspiration- it's well worth reading. Commodity prices (including oil) will respond.

Final bit of unwelcome news (for now) is that there is a US sovereign debt bubble strongly in progress presently. Bubbles inevitably burst and collapse. Commodity prices (including oil) will respond.

In the normal course of events (from which this differs some), there would be some extremely enticing derivatives to play. Trouble is the counterparty risk is high. This has been realised by many. Commodity prices (including oil) respond.

None of this is a secret. It is all in the public domain. The Arab oil producers know about it. Various Asian oil traders and consumers are well aware of it (especially the Chinese). As the value of the US dollar continues to erode, the response is an adjustment of prices of various items to compensate for that loss of value as well as to factor in the risk of holding dollars.

Sione

Sione said at September 11, 2010 4:25 PM:

Re Erlich-Simon bet

Erlich lost because he was a common fool, a class one moron, below even the level of a useful idiot, let alone social ballast.

Simon denominated the bet in US fiat money because, even though US dollars were eroding in value at the time, he knew the then current rate of inflation was lower than it had been in the recent past. He commented about this at the time. It all went right above Erlich's empty head. Simon must have been amazed that Erlich could have been so stupid as to take the bet.

Today the context is one of rapid inflation eroding the value of the US dollar. Hence, when denominated in fiat money, such as devaluing US dollars, commodities generally increase in price. This is presently being experienced. Further, a sovereign debt bubble is in progress. In this situation commodities become "safe haven", or refuge, for storing value. This also encourages an upward trend for particular commodity prices. For this reason, it is unlikely Simon would have denominated the bet in US dollars a second time around. Perhaps he'd have used gold or some similar constant as the measure. Can't ask him, since he died a while back.

Erlich remains dead wrong. Worse, a conman.

Sione

Randall Parker said at September 11, 2010 5:03 PM:

Sione,

We've been down this path with gold versus dollars before: The dollar's value has not eroded much in the last 5 years for the stuff I buy. I pay similar prices for frozen turkeys, water chestnuts, shoes, internet access, web server hosting, and a great many other services and products.

Your treatment of xd: You are being plain rude. You do not know much about the people you are arguing with and you have an unjustified confidence in your ability to deduce insights about them from very limited scraps of information.

Lakelevel said at September 11, 2010 10:10 PM:

Randal, Peak Oil is a fantasy and oil is at $75/barrel because shale oil and coal gassification are currenty illegal in the US and elsewhere. A little research will show you that oil from shale or coal is estimated to cost from 8 to 50 dollars per barrel. This cost include environmental restoration to mining activities. The restricion is political. Also we are cutting off more and more expoloration all over north america. If major shale and coal gassification projects were anounced tommorow, oil prices would plummet. It is Obama's stated goal to greatly increase the price of oil (but not too fast), so of course this won't happen any time soon.

Lakelevel said at September 11, 2010 10:21 PM:

So try and keep up here, if for the next 400 years, we have the ablility to produce as much oil as we are today and pay less than $50/bl , Peak Oil is a creation, not a reality.

Randall Parker said at September 12, 2010 8:43 AM:

Lakelevel,

The oil companies have private lands on which they could develop some oil shale. But by their own admission doing so is not cost effective at current prices. The idea that the federal government is an obstacle is remote from the truth.

A little research will show you that oil shale costs have repeatedly been stated as being getting close to being feasible to extract. A little research will show you that in 2005 Shell claimed they would be able to produce oil from shale at $30 per barrel in not too many years. Then in 2007 Shell pushed $30/barrel shale oil out to 2015. Then in 2008 Shell said they might make a decision around 2015 to start producing by 2020. So no shale oil in the next 10 years at least.

The devil is in the details. In those details oil companies keep hitting research results that cause them to keep pushing out dates for when oil shale becomes commercially feasible.

Read Robert Rapier on oil shale and click back to read his 2 earlier pieces on it at the top of that post. The EROEI problem and the water problem are both substantial. I doubt that Shell knows it has solved the EROEI problem. The company has an incentive to talk up its potential assets to look good to Wall Street. They've been talking this talk for so many years without getting close to acting on it that a large dose of skepticism is in order.

Sione said at September 12, 2010 1:15 PM:

Randall

You write, "The dollar's value has not eroded much in the last 5 years for the stuff I buy." Yet you also enjoy fretting about how the price of oil is rising due to "peak oil" (since 2005). Assuming you've been purchasing oil products, that's a contradictory disconnect you display there.

It's already been pointed out to you on a previous occasion that in an inflationary environment all classes of goods and services don't experience price rises simultaneously, instantaneously or in equal proportion. Nor are inflationary price rises necessarily smooth or continuous. There are significant time delays as the effects of inflation work their way through the economy. Wait a little and you'll be experiencing your price rises soon enough.

It is clear that in the present circumstance some commodities are already reflecting reduced value of the US dollar. This is occurring at a time when industrial output is well down due to significantly reduced consumer demand. The price increases are not occurring as the result of demand for depleted resource supply. The culprit is loss of value of the US dollar.

An important point to remain aware of is that the Fed (under Chairman Bernanke) introduced more than a trillion dollars into the money supply. They conjured this money up out of nothing (let them printing presses rip boys!). The existence of these new dollars eroded the value of all dollars. It is merely a matter of time before the results are experienced "on Main St."

Enjoy!

Re "xd"
Surely he can fight his own corner? Anyway, he's made it more than clear what he's about. He writes about what other people should do, doesn't dare mention what he's doing (or rather, not doing) himself. Obvious.

Sione


Randall Parker said at September 12, 2010 7:53 PM:

Sione,

I do not drive many miles. So gasoline prices do not affect me much.

Future inflation due to recent monetary policy: Sure, that's a real possibility. But emphasis on future. Of course, I take an obvious interest in the future. But right now there's little inflation.

Sione said at September 13, 2010 1:17 AM:

Randall

It is important to be very clear about what inflation actually is. Inflation is an increase of the fiat money supply by Central Banks. It is greatly magnified by the practice of fractional reserve banking. Price rises are an effect experienced as a result of such inflation. Inflation causes prices to rise or to be higher than they otherwise would have been (in its absence). Inflation has a destructive effect on savings and hence on investment. It is a destroyer of wealth and of welfare. It slows progress.

When you refer to "future inflation due to recent monetary policy" what you really mean is "future price rises due to inflation" or "future price rises due to inflationary monetary policy", since the inflation has already occurred. The policy of inflation has been in place for a long time (since the beginning of the Fed, which is really ironic) and accelerated at an incredible rate under the auspices of Emeritus Chairman Greenspan and breathtakingly under Chairman Bernanke. The resultant price rises are inevitable (like night follows day). It is just a matter of how they occur and when. Early days so far, but the price rises are occurring.

---

Bernanke's Jackson Hole speach is extremely important as he confirmed the "put" (as in Bernanke Put). That means that when the economy continues to tank and a flight from sovereign debt occurs, the Fed will inflate aggressively. Bernanke is not known to be a liar (indeed he is a distinguished academic and rightly recognised as a smart operator), so even if in disagreement with him there is little reason to doubt his word.

Sione

th said at September 14, 2010 4:18 PM:

Parker, world oil demand dynamics are changing faster than the peak oll fanatics can keep up with. What recession are you referring to? I don't see one here, world consumption barely noticed the US.

http://www.eia.doe.gov/steo/gifs/Fig6.gif

Nick G said at September 15, 2010 11:19 AM:

Inflation is an increase of the fiat money supply by Central Banks.

Sione, how would you describe the intellectual parentage of this idea. Austrian? What fraction of US economists would you estimate agree with that approach, vs defining inflation as a general increase in price level?

Sione said at September 15, 2010 11:32 AM:

Nick G

That's the standard definition. It's use dates back well prior to Lord Keynes (who knew exactly what inflation is).

I have no idea what fraction of US economists agree about anything! Seriously though, the common misuse of the term "inflation" by people who should know better is analogous to the misapplication and misunderstanding of terms "centrifugal" and "centripetal" in engineering by people who should know better.

Sione

Sione said at September 15, 2010 3:32 PM:

Chris T

GDP, CPI and the like are a very rough guide (and not very useful one except as a broad indicator). The idea of using aggregates, mixing much unlike data (often calculated in contradictory ways with conflicting premise) into a single number is problematic at best. I'm wary of using aggregates for that reason. Still, if one is going to go to the trouble of calculating a number to represent, say, the Gross Demestic Product of an entire national economy, then the attempt should be undertaken accurately and transparently. Arbitrary massaging of the calculation in order to adjust the final output to better reflect a particular political or economic ideology is deceptive and misleading.

You write, "This is actually based on basic economic reasoning. If prices rise and there is a cheaper alternative, people tend to switch to the cheaper alternative. Else we'd still be using wood in the CPI."

Saying something is based on basic reasoning is circular, don't you think? Anyway, if you are going to alter what you put into the CPI "basket of goods" why would that substitution necessarily be something cheaper than what was there previously? For instance, when fashions and other community values change, people often switch to more expensive alternatives. Notice how that is never accounted for in the CPI but it is allowed to alter the calculation of GDP upwards.

Was wood in your CPI? If so you may have noticed that lumber for home building is.... going up. Better replace it with dirt from the back yard and get that CPI lower.

I wrote that comparing the real is the ONLY reliable approach to employ. You answer, "I highly disagree here. If you only compare real, you strip them of any context...".

If you compare the real you necessarily keep context. That's because you are dealing with the real, not some mathematical abstraction. It is the stripping out of context by the construction of arbitrary aggregates and their consequent misuse by way of arbitrary adjustments that I am warning you not to place your faith in.

YOu continued thus, "...ie: Traffic deaths are about where they were in 1950 in real terms. Just comparing real terms would lead one to believe that safety has not improved in 60 years. However, this would be incorrect because there are far more people driving and driving more miles. Vehicle safety has actually increased dramatically since 1950."

Comparison of the number of traffic deaths between the 1950 aggregate figure and a present figure omits consideration of the causal mechanisms for those traffic deaths (it also omits your purpose in making the analysis- the purpose for generating "the number"). Context is dropped.

So. What is counted as a traffic death? Is suicide by car counted? Are failures of the roadway considered separately? Are driver issues related to health counted (he had an asthma attack just as he drove around the corner).

To know whether present vehicle safety is an improvement you'd need to know a lot more than how many died and how many miles are driven by how many people. Does your term "vehicle safety" refer to fatality avoidance alone or is there consideration of injury avoidance or injury reduction? If so, how is that determined? Does the term include driver related aspects such as intoxication or does it solely deal with structural integrity of vehicles during collisions (how well the occupants are defended). Are vehicle dynamics considered? Is a light, agile vehicle safer or less safe than one which is heavy with poor roadholding large phase lags and a state of the art active restraint and air-bag deployment system? How is that determined? Are you considering the number of accidents avoided due to superior vehicle dynamics or better drivers (due to training, cultural changes, habits, awareness etc.)? If so how? Does that relate to "vehicle safety"?

While you can state that the numbers demonstrate vehicle safety today is superior than for the 1950s, it is also clear that you have practicle experience in the matter as you likely have seen both new cars and old cars. You've also likely been exposed to media related to the subject and so on. Hence you are bringing a lot of context and experience in with your statement. So, it's not merely a sterile comparison of some numbers you have presented. That's fine, but never be unaware of what you are doing. Watch your assumptions (state them and be aware of them up front). Stay with the real.

You write, "The absolute cause [of the Fed debt] is not meaningless - not matching expenditures to revenue, but attempting to pick out a specific program is more a matter of personal preference."

The issues to consider here are whether government is a necessary function in society or not and, if it is, what tasks should it undertake, how they can be paid for, who pays, how much and how to restrict the government to its defined tasks exclusively.

The debt already exists and a readjustment of US standard of living downward is already necessary. Nothing can be done to avoid that. So, it might just be a good idea to consider ways of mitigating the economic catastrophe and preventing a reprise in the future.

You write, "Personally I favor a strong military - peace through strength. The worst wars in history have generally been fought when there was no clearly dominant power. That said, defense spending has grown a bit faster than one would expect for an efficient military and development and procurement programs have been chronically over budget."

"Peace through strength"? The USA is embroiled in prolonged and expensive wars. Hardly peace. This situation has persisted longer than at any previous time in US history. Also there are US military forces in +100 foreign countries. The wars in Iraq and Afghanistan are abysmal failure and are generating a shockingly deep and abiding hatred of the USA throughout the world. [BTW does anyone really believe that the death, injury and destruction caused by the actions of the US military motivates less hatred than some fringe pastor burning a Koran?] This is not heading towards a sustainable peace. Meanwhile the costs are titanic and growing. This contributes directly to the parlous state of the US economic situation. The vitality and strength of the US is being needlessly dissipated. The longer spending goes on unchecked, the more severe the adjustment to living standards in the US will necessarily be. Even senior military figures have commented about the looming "threat" of economic weakness. Rather than contributing to strength, fatigue is being generated... weakness.

Again, it is appropriate to carefully consider whether government is a necessary function in society or not and, if it is, what tasks should it undertake, how they can be paid for, who pays, how much and how to restrict the government to its defined tasks exclusively.

Sione

Nick G said at September 15, 2010 8:31 PM:

Sione, when I google "inflation definition" I get:

Web definitions for inflation
a general and progressive increase in prices; "in inflation everything gets more valuable except money"
wordnetweb.princeton.edu/perl/webwn - Definition in context
Search Results

1.
inflation Definition
inflation - definition of inflation - The overall general upward price movement of goods and services in an economy (often caused by a increase in the ...
www.investorwords.com/2452/inflation.html - Cached - Similar
2.
Inflation - Wikipedia, the free encyclopedia
A chief measure of price inflation is the inflation rate, the annualized ...... Frank Shostak, (2000), "The Mystery of the Money Supply Definition" ...
1920s German inflation - Inflation accounting - Inflation adjustment
en.wikipedia.org/wiki/Inflation - Cached - Similar
3.
Inflation | Define Inflation at Dictionary.com
Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of ...
dictionary.reference.com/browse/inflation - Cached - Similar
4.
Inflation - Definition and More from the Free Merriam-Webster ...
an act of inflating : a state of being inflated: as a : distension b : a hypothetical extremely brief period of very rapid expansion of the universe ...
www.merriam-webster.com/dictionary/inflation - Cached - Similar
5.
inflation definition
inflation - definition of inflation from BusinessDictionary.com: Sustained, rapid increase in the general price level, as measured by some broad index ...
www.businessdictionary.com/definition/inflation.html - Cached - Similar
6.
inflation: Definition from Answers.com
inflation n. The act of inflating or the state of being inflated. A persistent increase in the level of consumer prices or a persistent decline in.
www.answers.com/topic/inflation - Cached - Similar
7.
Inflation - Definition
In economics, inflation is an increase in the general level of prices of a given kind. General inflation is a fall in the market value or purchasing power ...
www.wordiq.com/definition/Inflation - Cached

-------------------------------------------

Inflation
From Wikipedia, the free encyclopedia

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1] When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.[2][3] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.[4]

Inflation's effects on an economy are manifold and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include a mitigation of economic recessions,[5] and debt relief by reducing the real level of debt.

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.[6]
----------------------------------------------------

I don't think the general consensus agrees with you.

So, why not? Really...seriously, why not?

Sione said at September 16, 2010 11:06 AM:

Nick G

Easy! Your "general consensus" is illusory and you are simply wrong. Did you actually READ the papers the title of which you cut and pasted?

Guess not.

Oh well.

Since you cited Shostak, you can start by actually reading the his paper, "The Mystery of the Money Supply Definiton", http://mises.org/journals/qjae/pdf/qjae3_4_3.pdf .

When you've read that, then you can review the papers he cites. You'll find Rothbard and Von Mises, both of whom reviewed inflation and defined it as did I. By the way, Shostak himself defines inflation this way, "Similarly, the essence of inflation is not a general rise in prices but an increase in the supply of money, which in turns sets in motion a general increase in the prices of goods and services." See his paper, "Defining Inflation" at, http://mises.org/daily/908 .

Turning now to a Rothbard paper Shostak cites, "What has the Government done to our Money". Rothbard writes thus,

"On the free market, money can be acquired by
producing and selling goods and services that people want,
or by mining (a business no more profitable, in the long
run, than any other). But if government can find ways to
engage in counterfeiting—the creation of new money out of
thin air—it can quickly produce its own money without
taking the trouble to sell services or mine gold. It can then
appropriate resources slyly and almost unnoticed, without
rousing the hostility touched off by taxation. In fact, counterfeiting
can create in its very victims the blissful illusion of
unparalleled prosperity.
Counterfeiting is evidently but another name for inflation—
both creating new “money” that is not standard gold
or silver, and both functioning similarly. And now we see
why governments are inherently inflationary: because inflation
is a powerful and subtle means for government acquisition
of the public’s resources, a painless and all the more
dangerous form of taxation."

He continues with an analysis of the economic effects of inflation. This is all available free of charge at, http://mises.org/books/whathasgovernmentdone.pdf It is to be recommended that you print it out and actually spend the time reading it.

There are many others who correctly employ the term "inflation" to identify an increase in unbacked fiat money supply by govt. Check out Prof George Reisman. His text "Capitalism" is excellent.

--

In economics there has been a substantial alteration in direction and substance coinciding (approximately) with the publication of Lord Keynes' "General Theory" (which you need to read if you want to glean an understanding of the basics of what conventionally goes by the name of economics in the present time). After L-K came various interpretations, clarifications and modifications to his GT. One important modifier and populariser was Samuelson since he was an easier read than L-K. From suchlike came the texts used to teach generations of school-boy and university "economists". During the course of the near universal adoption of aspects of the L-K approach the term "inflation" was butchered into the imprecise notion that many now hold. That had the interesting result that the mechanism of inflation (including the cause, the causal agents and the purpose) was no longer clearly considered, let alone understood, since the term was misdirected to refer to something different from what it actually was. "Inflation" became a term employed to refer to general "price rises", not the action of an entity in the economy. Hence cause and effect are conflated. The inflationary cycle in the economy is obscured under a vagueness of "price rises". In essence the situation is similar to how the term "liberal" (as in, of the Classical Liberal tradition) was hijacked to refer to a different political ideology than what it actually is. Newspeak indeed!

--

For each of the definitions you pasted above ask, what causes the prices to rise. Discovering what that be is fundamental and important.

--

In reference to the final Wikipedia passage you quote it needs to be considered that if inflation provides "debt relief by reducing the real level of debt" it simultaneously acts to destroy the pool of real savings and ,hence, investment. There is nothing positive about that.

Inflation does not mitigate recessions, it is causal.

Sione

Nick G said at September 18, 2010 11:03 AM:

Sione,

Language is not an objective thing: it's a set of symbols, designed to represent other things. It is the map, not the territory being represented by the map.

As such, it is socially defined: there is no such thing as a platonic eternal definition of language, perfect and separate from human existence. So, if economists, dictionaries and laymen generally define a word in a certain way, that is the definition. If the general usage of "liberal" or "inflation" changes, then the definitions change, even if those definitions seem less useful or even misleading to a minority.

Sione said at September 19, 2010 3:59 PM:

Nick

Gosh, that was quick. You read all those papers and considered them and understood them...

...

...well no, you didn't read them at all....

Fancy that, especially since it was you who specifically quoted Dr. Shostak's paper. What I did was read it and surprise, surprise, he cited some standard sources. He even defined inflation for you (had you bothered to look).

Let's see now. First you claimed a non-existant "consensus" and now you are attempting an appeal to social metaphysics in support of arbitrary, malleable "social definition". Your attempts to justify butchering the meaning of the term "inflation" come to naught. Perhaps it may have escaped your attention that practitioners of specialist arts and sciences frequently use terms which are not commonly understood by the general population (for example, the terms "certrifugal" and "centripetal" come to mind), nor "socially defined". Sure, it is possible in casual, non-technical, non-specialist conversation for loose use of terms. Nevertheless it remains vital when dealing with subjects such as economics to understand exactly and precisely what ideas or concepts a term (or several) refer to. It matters not that practitioners of economics form a strict minority in the world, nor that members of each of the schools of economics represents an even tinier minority still. They do not necessarily rely on society to identify concepts let alone define them.

{As an aside. There is a book written by George Orwell. It is called "1984". Worth reading, there is even a section dealing with language definition, the purpose and employment thereof. Orwell puts considered effort in to explain the nuances and purposes of the language "Newspeak". There is an important point he wanted to illustrate there. Take a look. It has relevance, even today.}

The important issue for you to grasp here (and I am assuming you are actually interested in economics to the point you'd like to know how and why the economy is behaving as presently) is that inflation is an action which is of fundamental importance. Given the structure of the present system of nationalised fiat money (some go as far as to identify it as "debt money"), central banks and fractional reserve banking, inflation is the initiator of a process which has ultimately enormous deleterious effect. For most this is experienced as a general debasement of their wealth, resources, well-being and standard of living. Their savings are eroded and in the end they find the "safety net" they believed in and likely "contributed" to is mere fiction. Retire on that suckers!

By substituting a sloppy and deceptive definition of inflation for the real one, popular though it may become, it is then very difficult to identify the activity of inflation let alone communicate it to others. What is achieved is conflation of price rises (and other effects) with inflation, a conflation of effects with cause. This is worse than cart before horse stuff. It's like calling the cart a horse.

Look! There's a horse and horse! Two horses. Something not right with that picture.

Returning to Dr. Shostak's paper regarding the definition of inflation, he attributes this to L Von Mises-

"Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation."

First, the proper use of the term "inflation" pre-dates establishment of the Austrian School of Economics.

Second, the final sentances of the Mises passage are telling. Ironically, prime justification for the central nationalisation of the money supply via creation of the Fed in the US was to usher in a new era of price stability, to gain a more constant value for the US dollar and to avoid booms and busts! Since then the Fed has inflated and inflated and inflated and inflated, and inflated some more, with consistent decline on the value of the dollar, consistent price rises and booms and busts (not forgetting the largest bust up until the present, the Great Depression- which should have resulted in the dismantling of what was then and remains now a massive example of government failure). Perhaps it is in certain interests that the correct use and understanding of the term "inflation" is now subtly obscured.

Here is another passage. This is from Lord Keynes (The Economic Conseqeunces of the Peace). Note how he emplyes the term "inflation".

"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

Note the "one man in a million" not being able to diagnose what is going on. It certainly does not help with the diagnosis if the disease is not identified, improperly defined, nameless...

In the end the recommendation has to be to stick with the definition for inflation as employed by intellectual giants of the field- Shostak, Rothbard, Mises, Reisman and even Keynes.

One bit of advice. Rather than arguing the margins, it is a good policy to engage yourself with the substantive.

Cheers

Sione

Nick G said at September 20, 2010 11:36 AM:

Sione,

I agree - a technical term is best defined by the relevant profession*. Unfortunately, there seems to be some disgreement here as to how the profession defines it, so I thought it might be helpful to show that there seems to be a general consensus in dictionaries and popular usage that inflation is defined in terms of effect (prices) rather than cause (money supply).

Now, I don't see evidence in your quote that Keynes is not referring to "general price inflation". He says at one point " As the inflation proceeds and the real value of the currency fluctuates wildly from month to month", which suggests he's looking at price effects (and big ones, at that), not causes.

If I were to go to the department heads of the 5 most prestigious university Economics Departments in the US (as defined, say, by US News & World Report), and I were to ask them "Does the word inflation, as used by economists, generally refer to general-price-inflation, or does it refer to expansion of the money supply?", I have the sense that they would reply that it refers to general-price-inflation. Would you disagree?

Finally, on a more substantive note, the Wikipedia article says the following:

"Today, most mainstream economists favor a low steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy."

This seems to get to the hear of the question of whether a low steady rate of inflation is a good idea. What are your thoughts on this paragraph?

*As a matter of curiosity, I'm curious what you thought of what I said about changing word usage. Would you disagree that for non-technical terms that social usage is the correct standard?

Sione said at September 21, 2010 1:37 PM:

Nick

You ask, "As a matter of curiosity, I'm curious what you thought of what I said about changing word usage. Would you disagree that for non-technical terms that social usage is the correct standard?"

It depends on the context. It depends upon where the dialogue taking place, what is being discussed, who is contributing, the subject matter or field of enquiry, who is present, what is the medium of exchange of the information (that is, is communication written or spoken, is it by text, email, telephone, essay, letter, etc.), who is present and/or has access to the communication and so on. For example, discussing the week's occurances with teens, as opposed to adult employees, requires different versions of language. Some words may be the same but used in entirely different ways, with different meanings- some subtle.

When requirement for accurancy and dealing with specific detail or elaboration is important it becomes necessary to be much more careful with definitions, even to the point of pausing conversation to clarify terms. In most casual or social settings this does not seem to be commonly necessary. Still sometimes there can be interesting results as misunderstandings are subsequently acted on (some types of comedy are based upon this type of situation).

So, to answer your question, the specific context is important in determining the standard. That context includes the nature of the ideas to be communicated.

---

Keynes points out that inflation is a debasement of the currency and eventually destructive of the economy. His use of the term is clear. Inflation is causal. The fluctuations of value of the currency occur as a result of the debasement of the currency by inflation.

---

I have no interest of who or what is considered "prestigous" these days. Relying on social metaphysics is not a valid approach.

What I would do if I were you and I wanted to understand the economy (and why it is as it is) would be to find out which economists actually explained exactly what the economy was about to do, and why, BEFORE it did it. The present recession/depression is a good subject to test against. As far as I can find there were those who did. Interestingly the defintion for inflation that such persons employ is the correct one- same as Shostak et al. In the end it is best to be guided by the intellectual giants of the field, rather than be distracted by the social ballast of the profession.

There is a second reason I'd make the enquiry as above. It is an entirely selfish reason. I like to ensure that my personal situation is safe, secure and as under my control as possible. It is not good policy to have one's finances, wealth and future tossed around like a dingy on a Beauford 12 sea. Unfortunately, if one does not understand the way the economy works and what is happening with it, the inevitable, analogous to broaching capsize, is where one's personal situation can be expected to end up.

The financial future for a lot of people (many good people included) is grim unfortunately.

---

Inflation causes booms and busts. Rather than "reduce" a recession, it is the direct cause. It isn't beneficial, nor moral.

Inflation increases the severity of recessions, prolonging them by hindering the clearing of malinvestments and obstructing the reallocation of resources to profitable productive enterprise & activities.

Inflation makes it much more difficult for the labour market to adjust to suit changed circumstances. This has severe effects for many people.

Inflation causes recessions. It makes them worse once they are in train. Why continue to consume the same poison that caused the ailment on the first place?

An important thing to realise is that a sustainable steady low rate of inflation is an impossibility in reality. An inflationary fiat money system complete with fractional reserve banking is an example of a Ponzi scheme- a pyramid. Eventually the inflation rate must increase, just for the system to continue to survive. The rate of increase is geometric- initially modest but soon enough it attains startling rapidity. Not beneficial (unless you control the printing presses!).

Inflation has consequences for the vast majority of people that are not good, yet few identify its nature or how it attacks them.


Sione


PS. A final aside. One of the fatal flaws of collectivism is known as the Problem of Socialist Calculation. Marx was intellectually defeated by the problem. Lenin demonstrated the impossibility of solution, overseeing the dealths of millions as he tried {both men knew well the problem}. Von Mises wrote about the Problem of Socialist Calculation and explained why it could never be solved. He explained how the Soviet Union would inevitably collapse. Subsequent attempts at solution by the various academic acolytes of collectivism only serve to demonstrate their failure. Even the heroic efforts of Lange failed. Prof Reisman explains why this must be so (see his text "Capitalism").

Given the history, it is amazing that there remain amongst the living those who seriously promote the notion that a nationalised, socialist monetary system generates wealth and promotes wellbeing. It is no surprise that most such critters are utterly unable to understand the corruption of inflation, how it relates to the structure of the money system and what that means in practice. Those who do understand and yet continue to promote it are engaging in deception.

Randall Parker said at September 21, 2010 8:44 PM:

Sione,

Have you considered writing a book?

Sione said at September 21, 2010 9:48 PM:

Randall

Yes. I have been collecting information about a topic of particular interest.

Sione

Manotick said at January 17, 2011 2:38 PM:

The Oil Drum has an article suggesting that the models for Peak Oil may not be correct and that what we are seeing is not a peak but a plateau that could last for some time. Here is the link.

No peak oil yet? The limits of the Hubbert model
http://www.theoildrum.com/node/7241#more

Post a comment
Comments:
Name (not anon or anonymous):
Email Address:
URL:
Remember info?

                       
Go Read More Posts On FuturePundit
Site Traffic Info
The contents of this site are copyright ©