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.


Ugo Bardi is a member of the Club of Rome, faculty member of the University of Florence, and the author of "Extracted" (Chelsea Green 2014), "The Seneca Effect" (Springer 2017), and Before the Collapse (Springer 2019)