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Tuesday, May 10, 2011

ASPO-9: the ghost of hyperinflation to come


What if hyperinflation is the next big thing? At ASPO-9 in Brussels, Jeff Rubin and Douglas Reynolds said exactly that.


At the 9th conference of the Association for the study of peak oil (ASPO) in Brussels, one of the speakers said that it was time to stop economists bashing. That is probably correct: economists are not worse than other professionals: they just suffer of the great visibility of Sturgeon's law in their field. The law says that "90% of everything is crap" (or, in a stronger form, that 99% is). So, if 90% (or 99%) of economists just don't get it, there is at least a 1% of them who do.

At ASPO-9 in Brussels we had two representatives of this 1% of economists: Jeff Rubin and Douglas Reynolds. Rubin was the first to speak and he gave a rather soft talk; he still predicted dark and dire things resulting from oil depletion, including the break-up of the European Union, the bankruptcy of Greece, and other niceties. Reynolds was more direct. He didn't mince words in saying that we were going to go the way the Soviet Union did in the 1990s. We are going to experience total collapse; together with hyperinflation. And he suggested to get ready to stock whiskey and cigarettes to use as exchange medium.

I mentioned in another post of mine that some talks at the ASPO-9 conference were rather scary, and I think these two are good examples. But Reynolds's mention of hyperinflation prompted me to ask a question during the discussion. One thing that I have been always wondering about is why in the 1970s the oil crisis brought two digits inflation, whereas the present one didn't.

At my question, Reynolds just replied with something like, "you ain't seen nothing yet,"  but Rubin gave a more structured answer. He said first that there is inflation in growing countries, China and India, for instance. But it is true that inflation is low in most Western countries. So, why is that? Rubin's point is that inflation has a specific purpose: it lowers the purchasing power of salaries and, as a consequence, it frees resources needed for new investments. That may not be nice, of course, but it is one of the ways the economy works.

What's happening now, according to Rubin, is that the role of making people poor has been taken up by outsourcing in that economic regime we call "globalization" . Even without inflation, if your job is taken over by someone in India or in China, you'll become poor just as well (and the guy in China won't get rich, either). So, with globalization, there is no need for inflation in order to reduce production costs. Globalization has the added advantage that Ebenezer Scrooge doesn't need to see Bob Cratchit, his impoverished clerk, in front of him everyday. Cratchit's job has been outsourced to India and nobody cares about him or about his children.

However, although inflation and outsourcing have similar effects, they are not exactly the same thing. Inflation is like the Grim Reaper, it cuts all salaries in the same way. Outsourcing, instead, is like a sinking liner - people in the lower decks drown first. People whose jobs can be outsourced are suffering badly, as Paula of Mythodrome said, "Everything I know how to do, it seems, can be offshored for $1 per hour." But not everyone is in that situation. Retired people, for instance, can still count on a reasonably stable income. No one gets rich on a pension, but at least pensioners cannot be outsourced to India.

So, if I understand correctly Rubin's and Reynolds' reasoning, I think that the conclusion is that outsourcing is becoming insufficient as a way of destroying purchasing power. The collapsing economic system, at this point, needs a further step forward. Hence, the present phase of globalization may be soon replaced by a more traditional one of hyperinflation. That will make everyone poor (except the rich, of course). I said that ASPO-9 was scary! The ghost of hyperinflation to come may really be the next big thing to materialize.

13 comments:

  1. L'unica soluzione per salvare il salvabile è la Fortezza Europa, fuori l'America e dentro la Russia. Dazi altissimi, blocco dell'immigrazione, tribunali del popolo per le attuali classi politiche.
    un uomo deve sognare...

    ReplyDelete
  2. Google xlate of anonmyous:
    The only way to salvage what is the Fortress Europe, outside America, and in Russia. High duties, block immigration, law courts for the current political class.
    a man has to dream ...

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  3. Ugo
    Nice link to mythodrome.

    I wonder about the financial/economic trajectory. I guess we get to hyperinflation eventually, but there is a strong case that the extraordinary 'bubble' of 'leveraged' credit will implode first, like any Ponzi scheme. Maybe oil for example will become for a period to be priced lower in dollars but fewer and fewer able to afford even the lower prices even across the 'developed' world? From Ireland to the young woman at mythodrome?
    I am one of the pensioners who can not be outsourced, and, ironically, am able to 'support' one of my children. That will rapidly be cut short of course if (when) we hit hyperinflation.

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  4. Well, Phil, money is made of the same stuff dreams are made of. It is a number, a tag, a little flag that we place on things that makes them look like something else. So, a barrel of oil may cost 10 dollars, 100 dollars or 1000 dollars and that is only our perception of how much it is worth. But a barrel is a barrel is a barrel, and oil, by any other name, would still smell as awful.......

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  5. Anonymous, a better translation of your comment is:

    The only way to salvage Fortress Europe is out with America and in with Russia. Slap high duties on imported goods, block immigration, summary trials for the current political class. And, well, a man has to dream ...

    ReplyDelete
  6. Ugo, love your posts but they could do with proofreading. Contact me if you would like help.

    Mac (ibimac@yahoo.es)

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  7. No hyperinflation before debt-deflation is finished (2-5 more years at least).

    No-one can print-out the way out of recession, otherwise the bond market cannot work. Look at the bond yields od Greece, Ireland, Portugal.

    Endless printing makes debt (and money) worthless, deflation means worth full but much less money left in the system.

    Expect collapse of oil prices soon an then shoot up through the roof...

    cheers,

    Alex

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  8. Reynolda and Rubin are incorrect. Higher fuel prices are deflationary, they allocate funds toward fuel away from other goods.

    Users can afford the fuel but not new cars, boats or other goods. This negatively effects these industries. Debt becomes unserviceable and finance businesses are effected.

    Peak oil is accompanied by peak 'real' money. It's economic output that sets prices (that can be paid).

    Great blog, btw.

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  9. One thing that I have been always wondering about is why in the 1970s the oil crisis brought two digits inflation, whereas the present one didn't.

    I think that there are at least three reasons to this.

    First: globalization.

    Second: we are in the middle of a financial crisis, with interest rates very low and real interests rates near zero.

    Third: changes in macro-economic policy, tight state budged is the new norm while the reverse would be needed.

    So, don't expect high inflaction for now, nor even hyperinflaction.

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  10. @Alexander
    No-one can print-out the way out of recession

    That's exactly what they did not do in 1929, and we know how it went. Providing liquidity to the market is a fundamental thing to do in a crisis like the one in '29 or the current one.

    Besides, "printing" is a reversible action. So, it is possible to return to a smaller monetary base at later times, when things have settled down.

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  11. @Ugo
    money is made of the same stuff dreams are made of. It is a number, a tag, a little flag that we place on things that makes them look like something else

    That's just plain wrong. We exchange stuff (or labour, or services) for money, without exactly knowing when we will spend the money earned nor the price level at that time. Money is a fundamental time-vehicle for value; but, due to uncertainty, it is also a flawed vehicle.

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  12. Did I dream it, or was there a comment posted by Steve from Virginia? Since withdrawn by author I assume? I found his comment, and previous comments elsewhere by Steve to be interesting.
    best
    phil

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  13. Phil, I don't remember such a comment. Maybe it was for another post

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