More Reasons Why Oil Prices are Going Up

For all of you “oil price equals inflation” enthusiasts, watch what happens with Japan’s nuclear power industry. Reports are that after April of 2012 Japan will have no working reactors. They will have all shut down permanently for various, mostly irrational, reasons. To still provide power, Japan will have to import fossil fuel, oil, to the tune of about $30 B a year. Think that won’t have some impact on international oil prices?

Coal fired power plants in the U.S. are expected to be shut down over the next few years because of environmental regulations. Where that power will come from is not clear as far as I can see, at least publicly, but oil may play some role (I would like to hear form someone with accurate information).

Those people in the U.S. who are losing their coal-fired power plants will see a double attack on their standard of living. Not only will their electric bills go up by an estimated 40% to 60%, but their bill for fuel for their car will stay high or also go higher. Who will they blame?

In other words, for various reasons, mostly having to do with government regulations, we are going to see a necessarily higher demand for oil over the next few years. If the large developing nations, especially China (I have written about China’s potential difficulties, so its oil demand is not a sure thing.), continue to demand more oil, and the nations of the world continue to restrict the oil industry’s attempts to find, develop, and produce from oil exploration (government owned “oil companies” are not competent to fill this need), we will see oil prices stay high, very high. As of this writing, oil prices are about $90 a barrel for light crude. (The price is lower than it was because a few countries, including the US, released oil from reserves. This is a short-term bandaide and will only mask the problem until they stop releasing oil or can’t release any more. No one is moving to free the oil companies.) If China continues its present demand level, we can expect to see oil prices rise. If China has economic problems (as I think it will) then oil prices will merely stay near their present levels as all of these regulations and irrationalities play out.

Are you watching the events in Greece?

What you are seeing in Greece you will see repeated often in the next few years. Other Eurozone countries who did not control their borrowing will also experience the same problems as Greece, Portugal, and Ireland. These were mainly Socialist governments that bought elections by promising what could not be delivered. Spain could be next, and Italy, then soon in France. The bigger countries will each have a larger impact on the world economy. Other Eurozone countries will be weakened significantly by the attempts to prop up the failing countries and then in the dissolution of the Eurozone. They will also be weakened by the decline of international trade, as countries cannot afford to buy internationally. We could see tariffs spring up again, as in the mid-1920s. If these countries default, you will see large bankruptcies in other countries and economic dislocations, that will be a recession and, perhaps, depression. Although US banks have made few loans directly to Greek banks or the government, they have insured many of the European loans. A default will touch us, hard. And we aren’t out of our own recession.

Notice that the endless rounds of intense discussion and bargaining, with actions that, if rationally based, would result in significant improvement in the situation, only that a few months later the same events occur again. And notice, no one is really surprised. In the blogs you find people just calling these intense efforts, “kicking the can down the road”. That is, everyone seems to know that these actions will not produce any legitimate results and that the future only holds more of the same, until bankruptcy or default occurs. These events, with the seriousness, intensity, pretend efficacy, and intellectual bankruptcy, are right out of Atlas Shrugged, complete with consistent failure.

In the next few years, as Europe spirals downward, we will see a similar failure occur in Japan, and ultimately in the U.S. The big difference for us will be that there won’t be anyone to pretend to bail us out. The IMF and other rich countries will have used up all of their resources by then (but then, most of the IMF resources came from us).

I always knew that these countries would suffer major economic disasters. I knew that they could not keep their welfare systems functioning in the long term. I was wrong, however, in the mechanism. I thought that the problem would be the aging of the population. The Ponzi scheme of taxing to pay current welfare state benefits would hit population problems (an application of Maltus that he didn’t foresee!). Okay. So I was wrong. It is the debt! Debt. We have seen several debt crises over the last decades. What is coming will make the earlier problems appear as minor ripples. Obama has really brought it all to a head for us. Our chance.

For those who are focusing solely on health care, what do you suppose it is like in Greece, or will be over the next few years, or will be when Greece defaults on its debt and has no money in the government till, or leaves the Eurozone and has to depend upon its own resources and inflates its currency? That will be our fate in a few years. Which will happen first, ObamaCare or our own depression? Even if you save us from ObamaCare, you will lose to the depression.

I did look at the Greek protesters as complete idiots, protesting the end of their gravy train paid for by others. But I have reconsidered. One commentator I read explained the reaction of the protesters by saying that the prospects offered by the government were very bad, and that default wasn’t significantly different, by comparison. They are protesting the dead-end view of the Greek economy. Unemployment was skyrocketing, production down, and government debt – what all the fuss is about – was way up. In fact, every account I have read of what is expected in the future for Greece, including those who are very critical of the Greek protesters, say that without the government spending, the economy will continue to spiral downward. No one that I have read expects the Greek economy (or the Irish or the Portuguese) to improve. Every commenter, even “conservative” ones, regard the government as a prime mover. Its reduced presence means continuously lower production and growth, they say. Now this is patent nonsense. Yet, it is also the case that these economies will die, not because the government is the prime mover, but because these countries have removed the prime mover from the economy by law and ideology. That is, the individual is forbidden to seek his own way and make his own decisions. Self-interest is not allowed to flourish. Laws restrict initiative, hiring, firing, and generally doing things – producing. By law and ideology, they have forced the atlas to shrug.

We can see the same thing happening today in our country. Businessmen continually say that in the current climate of uncertainty and forthcoming, vague regulations, they are not willing to hire or make plans. The decision makers are frozen. Major corporations are sitting on hoards of cash, but don’t know what to do. They are stopped in place by Obama and his willingness to arbitrarily assert control over men. Greece is an advanced example of our same system.

I am an admirer of Greece, Ancient Greece. One cannot forget, however, that the present inhabitants of Greece bear little resemblance physically and intellectually to the ancients. The ancient Greeks were heroic both physically and intellectually. The present Greeks are not. The ancient Greeks laid the foundation for Western Civilization, and all that it could be. The present Greeks have no knowledge or desire to know what the ancients learned. The ancient Greeks made possible the United States of America. Unfortunately, Greece is our future, but not like Greece was our past. Unless, of course, the descendants of the ancients stand forth and don’t let their world go.

Inflation Update: Mid 2011

The U.S. Bureau of Labor Statistics just released its monthly announcement of the CPI (Consumer Price Index). The index showed some modest growth in consumer prices, .03% over the previous month. These numbers did not meet expectations, but the differences are small. Then there is the “core” and the broader index. The core is supposedly more important because it represents consumer goods that are less susceptible to short-term market swings, and thus are more dependable as indictors of the direction of prices. Maybe. It is obvious that there is a lot of manipulation of the data that the Statistics Department uses for the CPI. If that manipulation is for political reasons, as many suspect, or not, the consequence is that the index tends to be far removed from what residents experience on a daily basis.

More importantly, so what? What both the average economist today and most hyperinflationists tend to think is that if prices are going up there is inflation. What it means for that average person, on the other hand, depends upon whether his own income is rising at least as rapidly as the price increases. If a person’s income is not increasing as rapidly, it means making some difficult choices and seeing a constant drop in living standards. It a person’s income is increasing as fast, it means that one isn’t any better off. It is only an illusion.

But inflation is not increasing consumer prices. Inflation is the expansion of the money supply by a government. The expansion of the money supply is a form of taxation, making our incomes and savings worth less, It also makes government debt easier to pay off and defrauds the lender. That is one of the reasons it is popular with governments.

Looking at the data available from the Fed, it appears that our two-year hiatus from the threat of increases in the money supply is coming to an end. First, business loans, after a dive, have begun increasing. We will have to keep a careful watch on this, but the seeds of destruction are beginning to take root. If the interest rates were something near a market level, an increase in business loans would be a good sign. With interest rates as low as they are, the new loans could be anything from meaningless to bad news. Again, we have to watch.

The money supply indicator that I watch, MZM, has also begun to climb upward again. This isn’t surprising since the Fed has been trying to get it going upward for a couple years now and it was bound to happen sooner or later.

I want to point out a couple things about that chart that are important. I want you to avoid the knee-jerk response that many will have that the sky will fall immediately. This is a thirty-year chart, ranging from $1T to $11T. The dollar increments are evenly spaced per $1T steps. The slope of the recent increases is closely in line with the slope on the chart from 1995 to the present. (Admittedly, it is a little difficult to tell how steep short-term changes are on this small chart. The actual data is available, but it is too soon for us to tell the actual trend. For the sake of this discussion, let’s go with the appearance.) An increase of, say, $100M dollars in the money supply in 1985 moves the slope up at the same rate as an increase of $100M today. But the base from which it increases is considerably higher today. A new $100M today has much less impact than it did in 1985. Today, such an increase wouldn’t be noticed. The rate of increase we see beginning in 1995 and running nearly continuously through today, with two brief recessionary periods, has resulted in modest amounts consumer price increases, relatively speaking (you will find that I have damned even small levels of continuous consumer price inflation elsewhere in my blog, but here we are making comparisons to hyperinflation). For the rise in the money supply to have the impact it did even ten years ago, it is going to have to be an increase of a larger amount and a steeper rate of climb on the chart. For it to cause hyperinflation, the increase in the money supply, as shown on the MZM chart, will have to be nearly straight up.

The Fed wants to see a rate of price inflation (what it mistakenly calls inflation) running around 2%. This is already a betrayal of the American population. Any inflation is a disaster for all savers and those on fixed incomes. For many years, the Fed policy was to be willing to accept inflation of between 1 and 2%. Now it wants 2%. In a couple years it will be 3 or 4%. Such is their level of intellectual honesty and responsibility. Anyway…

So the Fed wants 2% of price inflation. The money supply is moving up, business loans are moving up, the Federal deficit is moving up, and, although commodity prices have backed off a little, they are still very high. Employment is not improving. What makes the Fed think that when price increases hit a two percent annual rate they are going to do anything but continue to increase faster and faster. We don’t have to postulate hyperinflation (20% or more annually) to suggest that increasing prices aren’t going to become a prominent news item. The Fed is going to have to react and the only thing it can do is to raise interest rates and take money out of the system. It is going to have to work hard and fast on the money removal program because of the amazing overhang of Fed member reserves that are just sitting there. If (I mean, when) prices begin to increase faster than the Fed wants, its curative actions will take some time to have any impact, even by its standards of the last twenty years, because of the $1,4T in excess member reserves just sitting there. The Fed is going to show itself as unprepared, intellectually ignorant, and ineffective. It will not be pretty. They do have one amazing, strong, successful capability: they blame everyone besides themselves. Ultimately, as has happened every time things have not gone well in the last century, it will be capitalism that will be blamed.

As I have often suggested, continue to watch your own situation. Be prepared for higher prices (these increases will not occur evenly, but in certain segments of your budget), and try to not be exposed to rising interest rates, i.e., don’t own bonds, have long-term fixed debt obligations if you can.

I don’t see this disruption from the Fed’s difficulty with interest rates as necessarily a step toward an economic depression. Government figures may show a recession (in the real sense, we haven’t left recession, not with our high unemployment).

My list for depression triggers is the Federal debt (higher interest rates could bring that issue to a boil), the default of one or more of the Eurozone countries (that situation could make the residential real estate mortgage meltdown of 2008 look modest), or the disruptions and craziness of the implosion of the China real estate market (who knows what kind of rioting, mayhem, crackdowns, and blaming of capitalism that could happen in that country).

Since the end of 2008 and that meltdown, the U.S. economy has kind of been drifting, not recovering, not being obviously self-destructive. That period couldn’t last for long. Since the powers-that-be weren’t willing to let the economy heal, our only real choice for the future will be difficulties. The possibilities range from painful to the worst depression in history. To some extent what will happen is in our hands. Let’s see if we can turn things back toward reason, freedom, and prosperity.

Uncle Ben Spoke, and a couple Economics Lessons

Uncle Ben had a press conference a couple weeks ago – a first for a Fed Chairman.  (Uncle Ben Bernanke, Chairman of the Federal Reserve Board.)

And didn’t really say anything. Transparent! Transparent = Nothing! Fits.

So, Ben said that inflation expectations are low and that core inflation is low and the Fed isn’t responsible for anything that might be bad and everything that the Fed is responsible for is good and coming along, perhaps slowly, but coming along. Notice that when he discusses his policies he refers to the models and intellectual justifications, not to the results and consequences, not to the facts of reality.

Bernanke’s history at the Fed has shown that he does not believe that any of the problems that the economy has experienced are the result of the Fed’s policies. The Fed does the right thing and somehow, some other source of economic action causes things to go wrong. The Fed, Bernanke, is always right. He knows that he is right. He doesn’t know why things go bad.

More fundamentally, no result could cause Bernanke to question his beliefs. He is not reality oriented. He also hasn’t seen anything bad that was coming. In 2004, 2005, 2006, and 2007 he kept saying that everything was just fine. Then, in 2008, he said things weren’t doing so badly. Then, in 2009, he said that his actions had saved us all.

He does have the power, by being the Federal Reserve Board Chairman, to manipulate the economy. And he is intent on doing so. We are at his mercy, at the mercy of his mistaken views, at the mercy of his lack of contact with reality. We, the American people and the world, will continue to suffer.

But here is where I get very upset with the people who are criticizing him, those who post blogs and comments, etc. I include many Objectivists. The only thing they apparently see is inflation. Apparently, if commodity, food, and oil prices weren’t rising, they would have no problem with Bernanke. Well, they would probably howl that Bernanke’s policies would lead to inflation, but it would always be inflation, inflation, inflation. One note Johnnys.

It is certainly the case that the Fed’s only purview is monetary policy, i.e., pumping money. But controlling the money supply has other consequences, and to ignore those consequences is to leave Bernanke and his fellow government manipulators a free area of activity, damaging activity, deadly activity, immoral activity.

For example, one of the actions of the Fed is aimed at keeping interest rates low (the activity they have some direct control over, as opposed to the money supply, which is controlled indirectly) completely distorts a basic, key price in the economy. Interest rates are important in an economy and impact many decisions and other prices. People are just not able to make rational decisions in such an environment. I mean, since rationality consists of observing reality and acting accordingly, without basic, accurate information about the economic situation, rational decision-making is not possible.

I know that some argue that businessmen are smart and know that the interest rates do not reflect reality and adjust their thinking. I am sure that they do. But how much do they adjust? What can they think is the reality of the situation? I mean, without the facts, the businessman is only guessing. It might be a smart, experienced, wise guess. But it is still a guess, not knowledge. As a guess, it could still be way off. It could still be damaging. Further, since it has been literally decades since a market for capital has existed, any guess cannot be based on any actual market experience. A businessman’s wisdom is not an argument that changes the significance or the damage done by the manipulation of interest rates by the Fed.

The impact of the Fed is much wider than real or potential rising prices. People need to stop thinking that inflation is the only or even the major issue in every situation.

By the way, I was looking at copper and corn, two of the “commodities” that people are referring to when they say that “commodity” prices are rising. It may not be significant (you can’t really tell until sometime later), but both have backed off their recent high prices. I don’t know why yet, that is, I don’t know if it is a lowering of demand or if new production has come into the market, but if this trend continues, or if they just don’t keep going up, the contention that the Fed causes every bad economic consequence in the world will be even more questionable. Then the problem of being unscientific, i.e., not looking for causes, will have bigger consequences because it will make all criticism of the Fed look unsupported.

There is another error in the thinking of many about the economy. It is thinking that by knowing at least some of the consequences of the actions of government in the economy that one knows something about economics. Recently I have seen people dismiss comments I have made merely because I didn’t attribute what they viewed as negative economic consequences to a government. It is as if the only economic actor who has any efficacy is the government. Certainly, they conclude, that if anything happens that they don’t like it must be the fault of the government. There are several fallacies involved in such thinking, e.g., affirming the consequence, but the most basic fallacy is just not having taken the effort to learning the subject.

As a reader of Ayn Rand, we have learned that one must use one’s own judgment. This is important for many different, fundamental reasons, including moral ones. There is, however, an important context: a judgment without knowledge is not rational. That is, in order to decide, judge, conclude, make any kind of rational decision, one has to have knowledge of reality. Making a statement, declaring a judgment about an economic subject means you have to know economics, the fundamentals, and not marginally.

The fundamentals of economics involve the actions of individuals, people, acting as producers and consumers. It involves markets, prices, costs, production, and making economic choices. The actions of government overlay the reality of production and consumption. The actions of government affect what people do, the prices resulting from market actions, what people ultimately produce and consume. But the governmental actions are not fundamental to an economy, or its study. The fundamentals are the reason for the existence of markets, prices, and the creation of wealth. People acting for their own benefit are efficacious. Government action only corrupts.

It is often next to impossible to foretell what the results of government action is going to be because of the complexity of an economy, of the large number of actors, of differing interests and motives. In that government action is intended to get people to act differently than they would normally, the results cannot be good. But to identify and understand those results, you have to include the primary market participants. To ignore them is to drop the context. The primary actors are the individuals.

Japan, Disasters Natural and Economic

Let’s start, not with economics, but with the scare of the century: nuclear energy.

Japan has now demonstrated that it is no more advanced or science savvy than any other country in the world. Its politicians are picking up on the irrational fears of a portion of the population and have begun pushing the country toward energy policies that will not only take them away from the safest and (if allowed to be) cheapest energy source, but will lead the country toward bankruptcy much faster than their current pace.

One thing that really astounds me, angers me, too, is that the media and popular frenzy over the problems at the Fukushima Daiichi power plant has apparently overshadowed the real, desperate plight of hundreds of thousands of their fellow citizens.

Further there is such a disparity between the real and, at best (worst?), potential danger. Where is the disaster? Think of it, all of the deaths and missing from the earthquake and tsunami versus all of the deaths and missing from the nuclear accident. Wait, what deaths? What missing. So the actually dead and missing from the actual disaster have been shuffled aside because of uneducated, poorly founded, hysterical fear of a potential. (At this time three employees of the electric company have died, two from the tsunami. I have not seen a report as to the cause of the third death.) Even the property damages are not comparable. The tsunami destroyed, obliterated, thousands of homes, businesses, and all of the infrastructure for over five hundred thousand people. Around the power plant, all of the homes and belongings are there, and, at this point, there has been no scientific suggestion that the contamination from radiation that there might be is anything but short lived. Some of the radioactive material that has been mentioned has a half-life of a few months and much of the material that has reached the ground around the plant will be washed away. Of course, we will not know the actual damage until the problems at the power plant have been solved. But that is what is missing here, knowledge. We have hysteria, not thought.

Granted, one has to recognize that Japan, alone among nations, has some reason to feel more concern about radiation. It has its own history. I do not want to belittle or underestimate the personal feeling many Japanese may and do feel. But I think that the Japanese who are voicing their fears and declaring nuclear energy to be evil have not given their personal connection to radiation proper respect, either. Rationally, you would expect someone to do research and learn about the reality that concerned them. Knowledge is the first and best way to deal with a subject, especially one that has such a scientific foundation. But, no, there is no evidence that the protestors or whimpering, crying “victims” have made any attempt to gain knowledge. They expend all of their energy beseeching the government to protect them and make Japan nuclear free. Instead of knowledge they went for dumb and are unquestioningly giving more power to the politicians, who go for dumb by definition (by choice).

Also ignored is the fact of the unprecedented size of the earthquake and tsunami. The earthquake is one of the largest man has experienced. There hasn’t been an earthquake to rival the recent one for over a thousand years in Japan. The tsunami was equally out of the ordinary. The preparations at the Fukushima Daiichi Power Plant protected it from a wave three houses high. What it got was one four houses high. One wonders that if the planners had proposed protection from such a massive tsunami, and insisted on funding the required cost, would the government regulators in Japan have allowed such an expense. The entire controlled planning process is ignored.

We see the same type of reaction from hysteria and ideology in California. People are shown on TV trooping down the beech near a nuclear power plant, claiming that if there were to be a big earthquake there, the power plant would suffer the same fate as the one in Japan. Yet, if you were to discover that the power plant has been built with a 8.5 magnitude earthquake and not a 9.0, you would still have to wonder about the protestors. If such a disastrous earthquake occurred along the California coast, the fatalities and missing from the earthquake and tsunami would be enormous. Where is their concern about the actual event? The fact that they are ignoring the obvious real, immediate consequences and worrying about what would be a mere potential, a maybe, indicates that they really aren’t concerned at all, but are engaging in thinly veiled ideological attacks on nuclear power, technology as part of the industrialized world, and capitalism.

At least those people in California can be ignored, since they would be swept out to sea by the tsunami never to be heard from again. They wouldn’t have to worry about potential radiation. But, in Japan, it is disheartening to see such ignorance paraded in a country that was so proud of their educational system and their recognition of technology as an important foundation to their prosperity and liberty. It indicates that the attack on the mind epitomized and lead ay Immanuel Kant has spread far and wide. His influence is not merely a Western phenomenon. When someone says that Western culture is spreading we know now that the spread includes the entire package. (I do realize that the historical culture in Japan isn’t particularly supportive of independent thought and learning. So the Japanese are being intellectually undercut by both influences.)

We can also see the spectacle of supposedly modern Western countries banning Japanese products without regard to the actual area of potential radiation. Apparently the Europeans do not have maps of Japan or have a clue as to its size. It is certain that there is little regard for science or reasoning in Europe, only the appearance of the authorities “protecting” the public. And by protecting, we mean stopping international trade and prohibiting free, voluntary exchange of goods and services. In the name of safety, we get lowering standards of living and a more rapid move toward poverty.

In the face of the reaction of Western Europe, one can hardly criticize a backwards country like Russia or even other Asian countries for similar hysteria.

Back to Japan, look at what is happening economically because of the earthquake and its consequences. Before the March 11 earthquake, the Japanese government was talking about finding new sources of revenue to cover the growing needs of the elderly and retired. They knew that the current arrangement, and the debt they expected to require would not be sustainable. They were headed for major difficulties. Now, with a small, but significant part of the country almost completely destroyed and over a hundred thousand evacuees living in shelters with their lives completely disrupted, not to mention the businesses of all kinds that no longer exist, plus the other consequences of the disaster, the Japanese government is being asked, demanded, to do much more. The government is being asked to backstop the damages that the utility company that owns the Fukushima Daiichi power plant in paying damages to the people and companies forced to evacuate from the area immediately around the power plant. (One hopes that there were actual dangers involved and not government hysteria.) The government is intent upon cleaning up the areas destroyed by the tsunami, building temporary housing, and, no doubt taking care of the survivors for some time. Communities across Japan are asking that their nuclear power plants be closed, and that the national government provide compensation for the resulting economic cost. The list of new demands on the Japanese government just keeps growing without any regard for reality.

The government is now asking for a supplemental budget from the Diet to cover their initial expenditures. At the same time, the current government is getting a lot of criticism. It appears that the governmental leaders haven’t spent enough or made sufficient promises.

The Japanese government just released figures that show their economy going into recession earlier this year (meaning output is falling). They expect the decline to continue throughout most of the year. So, the government is spending more, borrowing more, receiving less in taxes (or taking a greater percentage of the national and personal income in new, higher taxes) in a declining economy. They think that the governmental expenditure will help turn the economy around. They have not noticed that governmental expenditures haven’t help much over the last twenty years. No one there actually looks at the results of what the government does. They just make demands.

Japan is the world’s third largest economy. On a per capita basis, it is also a prosperous one (national figures don’t mean much, really). That it is in decline means a great deal internationally. It will hurt the Asian economy. It will hurt everyone. We are seeing again how the world economy, world production, is interconnected.

But one thing that you won’t see internationally from Japan is a government credit default. The problems we see in Europe won’t happen in Japan. Greece, Ireland, Spain, and the others have sold their debt, government debt, to a great extent to non-citizens, mostly foreign banking institutions. If Greece were to default on its debt, the problem would be felt in other countries, and we would have an international banking crisis, as we have had in the recent past.

Almost all of the Japanese debt is owned by its citizens, not by its banks (although I am sure that some is), but by individuals. Much is owned by the elderly. No wonder the elderly are dependent upon the government. They invested heavily in government bonds (the Japanese were, are, great savers) and the government has been repaying them by keeping the interest rate very low, about 1.25%! Japan doesn’t have a lot of price inflation, but it isn’t a cheap place to live. Getting 1.25% on your investment has got to make life very difficult.

When the Japanese government gets into trouble, because of all of the obligations it has, the people who will suffer will be its own citizens. The government will not be able to support them, pay their medical bills, or pay them the interest or principle on their savings. It is going to be a very great tragedy. The March 11 earthquake and tsunami will be relegated to secondary importance (Of course, a nuclear accident, with no deaths from radiation, will always be bigger than any other event. Just ask about Three Mile Island!)

When the U.S. gets to the point where its debt is so large that it can no longer support it, we will go more like Greece, and take the world with us.

The Downturn in Commodity Prices

So here is an opportunity for a lesson in observing the economy. In the last few days some commodity prices that have risen significantly in the last couple years, including oil prices, have backed off their highs. I have seen several articles claiming that this price drop proves that the Fed and other inflationary forces are not to blame for the price rises.

Now anyone who has read this blog may remember that I am not convinced that the the Fed's activities  the primary cause of the rise in oil and other commodities’ prices. I see real, actual economic causes at work. But I can not allow my analysis to then infer that recent lowering of those prices proves me right, or proves anything particularly at all. Short-term changes in prices offer little evidence of anything.

Frankly, I think that looking at short-term events is an indication of a lack of thought. It is a knee-jerk reaction. It is a sign that the source has little understanding of actual economic processes and is instead seeking to support his own predetermined ideological position.

Of course, the recent downturn could become something more than short-term, meaning that it is too early to tell if the drop in prices means anything.  If the declines continue, then we have something to consider.

Suppose the drop in prices becomes a trend. We would need to ask why the drop is taking place. The first thing to do is to look at production. If production has increased, then we can regard that as a significant element of the price drop. As government actions, especially money creation, haven’t changed much, changes in production would be the major factor.

If there has been no change in either production or government activity, then we are faced with a weakness in the actual demand for the product. That is, economic activity is lessoning, and we may be seeing the first steps toward a downturn in the world economy.

What changes in commodity prices, prices that are more responsive to market changes than most, means depends upon the details. We should never accept knee-jerk reactions that look solely toward the government.

A China Update

The Chinese government is rightly concerned with the rising level of prices within their economy. (Some here blame China’s problems on our own Federal Reserve System. While the economic actions of our governmental bodies certainly add to the economic problems in the world outside our own borders, we should not underestimate the ability of nearly all other governments to make decisions as bad or worse. China’s problems are mostly of their own making.) China has certainly been creating new made-up money with gusto. And don’t forget that the banking sector in China consists of (at least mostly) banks owned and controlled by the government. The Chinese equivalent of the Fed is aware that domestic prices are rising faster than is good for the economy (as if any consumer price inflation is good for anyone). They are now trying to slow the price rises and not bring their real growth to an end. It is going to be difficult, especially since they are using the same tactics that the Fed would use in the U.S.

To slow things down the Chinese government has been trying to reduce the growth in bank lending. They are not only using interest rates but are also trying to take cash out of the system. Their problem is that there is just too much cash running around. They will have to tighten up a bunch more to have sufficient impact, and that might, probably, increase interest rates sufficiently to reduce growth. When interest rates start up, they will then begin attracting money from other sources, which will not help their situation. That attraction will mean that other borrowers will have to compete and raise interest rates, maybe the U.S. will, also. Most countries are deathly afraid of rising interest rates. Higher rates are associated with slowing growth. This is just the opposite from actual economics. In a free economy, higher interest rates would signal that there was significant demand for capital. Higher interest rates would attract more savings and the rates would tend to do down. In this world controlled by central bankers and based upon fantasy economics, the supply of funds to loan is controlled by governments, and the supply is unlimited (and worthless, ultimately). Higher rates means that the governments are trying to slow the rise of prices and the fears of “overheated” economies, read worsening price inflation.

China’s problems are worse, however. According to one report, the real estate price boom has been raging. It said that prices for condos in the big cities has risen by over 50% in the last two years. 50%!!! One city has passed a law restricting the people who may buy these properties: not people from out of town nor speculators (plus a few other types). Real estate in China has reached the extremes of a boom market. It will reach a point, and I would think soon, that the last buyer will have bought (this is even more likely since many potential buyers are forbidden to purchase!). When that last buyer buys, the market will begin to fall, just like it did in the U.S. a few years ago. The fall will wipe out a lot of apparent value (paper profits) and will have significant, adverse consequences for the fake Chinese banking sector (fake because the banks are hardly real, independent actual banks). It will be interesting to see what happens. It certainly will be difficult for any company doing business in China. It will be difficult for Asia, coming on top of the Japanese losses due to its natural disaster (natural vs. man-made in China). It will be difficult for the BRICS, as tied together as they are. It will be difficult for Europe and North America, as dependent as we are for Chinese products. Maybe China will realize that a currency valued openly has some merit?

Whatever the actual results, what matters is how people understand the causes of the Chinese mess. More than likely, many people will point to the apparent greater amount of freedom the Chinese have had, i.e., the more their economy appeared to be capitalistic. They will ignore the degree of control the Chinese government continued to have, especially within the banking sector. Some may point to the currency controls the Chinese had, but many will also blame the Fed (not that it is bad to heap blame on the Fed – just be accurate). It is important that the proper cause be identified. We are the only ones who can do it.