[R-G] [BillTottenWeblog] Peak everything economics ...

[Bill Totten]

or, what do you call this mess?

by Richard Heinberg

Energy Bulletin (January 23 2008)


It's becoming increasingly clear that 2008 will be a catastrophic year
for the US economy, and therefore probably for that of the world as a
whole. The reasons boil down to two: continuing and snowballing fallout
from the subprime mortgage fiasco (exacerbated by an orgy of
debt-leveraging), and record-high, continuously advancing oil prices.

But will the impact be inflationary or deflationary? This matters,
because the diagnosis determines how governments and financial
institutions should respond, and what private citizens should do to
protect themselves.

Part of the answer depends on how one defines the terms.

Some economists are in the habit of defining inflation simply as rising
wages and prices. From this standpoint, high oil prices (caused by
depletion and scarcity) are inflationary.

Others define inflation as an increase in the money supply. Some would
take that a step further by defining inflation as growth in the money
supply that outpaces growth in the productive economy.

In the current instance, Peak Oil is occurring at the same time as the
bursting of the real estate bubble, in which a rapid decline in the
value of property is effectively causing money and credit to evaporate
from the economy. This is being called a liquidity crisis, but for
financial institutions it actually amounts to a solvency crisis, and
will likely result in the collapse of several major banks. From a
monetarist point of view, that's deflationary.

The remedy? The Federal Reserve is lowering interest rates (to expand
credit) and the government itself is considering an "economic stimulus"
package, which will evidently consist at least partly of a direct tax
rebate - checks in the mail to tens of millions of citizens. Some have
likened this to dropping new money out of helicopters, and are calling
Fed Chairman Ben Bernanke "Helicopter Ben". Helicoptering in new money
is inflationary. It will cause a decline in the value of the dollar (in
deflationary times - like the 1930s in the US - currencies typically
hold or even gain in value because there is not much money to go around).

The US dollar is in fact losing value - a sure sign of inflation.

So here again is the dilemma: given these factors in play, how does one
know what's in store for the economy? What does one call the emerging
condition?

It may be enough just to call it a "depression". Even mainstream
publications are now using the "D" word, at least conditionally. But
most depressions are deflationary, and there is the nagging problem of
high energy prices that are now beginning to filter down through the
economy, skewing food prices up as well; and there's that declining
currency value as well. Aren't those symptoms of inflation?

As oil becomes more costly, a greater and greater percentage of societal
resources will be going to energy and food production, draining other
sectors. This is in fact inherently deflationary (even though the price
hikes may be interpreted as inflation), because the proportion of
societal resources going to support consumption (infrastructure, wages,
and credit) will inevitably have to decrease. Jobs in most sectors will
vanish.

Yet as the crisis unfolds, there is every reason to think there could be
periods of hyperinflation - though only in certain sectors of the
economy. We are seeing evidence of every desire, on the part of the Fed
and the government, to increase the money supply and thereby forestall
the credit crunch ensuing from the subprime mortgage disaster. But
where, exactly, should they inject that money? There really aren't many
options. Through more government debt? That's a foregone conclusion. By
propping up banks - that will nevertheless be in no position to pass on
that money by making new loans? There may be other ways as well, but
they will all show up as symptoms of inflation or hyperinflation. They
will all also result in the destruction of the efficacy of the currency
itself.

In other words, as this mess unfolds we may see extreme symptoms of
inflation alongside those of deflation.

For an economy, this is the worst of all possible worlds. We have never
seen anything quite like it. Maybe it's a "Perfect Storm" economy.

Fortunately, there is at least one upside to all these downers: the
collapse of the current debt-and-growth based economy may finally force
a redesign of the money system and the "science" of economics. But this
will take a while, and it will help if there are good ideas out there
being widely discussed and promoted, such as the notions of a
steady-state economy or an energy-backed currency.

Meanwhile, if you're interested in finding shelter during the storm, get
thee to the productive side of the economy. Grow something, or learn to
make or repair something useful.

_____

Also posted at Heinberg's site
http://www.richardheinberg.com/peak_everything_economics
and Global Public Media.
http://globalpublicmedia.com/heinberg_peak_everything_economics

http://www.energybulletin.net/newswire.php?id=39472


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