Over at The Automatic Earth, I was having a conversation with some folks about the price of oil in the April 27th Debt Rattle thread. My concern is that we are not facing a traditional recession/depression at all but rather are facing the leading edge of oncoming waves of scarcity driven by serious overpopulation. Because of that, I felt compelled to expand upon that dialog and it got large enough that I decided to do it here rather than as a reply there. Before I proceed further, if you don't understand the difference between prices rising due to scarcity and prices rising due to monetary inflation then please do not read further. I'm not going to answer basic questions about such things that you can get from multiple other sources on the net.
Now, to continue that conversation from TAE, let's take a look at what is really happening around the globe. At te current time, grain prices are through the roof. Some of this is due to speculation, some to trade barriers being erected (due to food security concerns), but a large fraction of this is due to shortage. We know that UG-99 is causing havoc with wheat in Africa and now the Middle East and it is expected to move into Asia proper this year. The planet has consumed more grains than it has produced for 7 of the last 8 years, reducing the 2000 grain surplus of 110 days global food supply to under 57 days global food supply. Regardless of deflationary pressures, this is going to produce upward pressure on prices (NOT inflation!!) due to shortages until shortages are alleviated.
Likewise, consider the price of gold, which has fallen by roughly 10% (slightly more) into the $890-$900 range. Gold is money and since the global monetary situation is deflationary, gold is sliding somewhat with it. This however will vary over time as people move from fiat currencies back into gold and silver. Which way will these two precious metals go? Beats me! The combined problems of deflation coupled with flight from fiat currency (upward pressure on gold prices) look completely unpredictable to me at this time thus I have zero interest in playing the gold market in any speculative manner.
However, look at oil. Oil remains on an upward trajectory. So long as any global technological civilization exists AND that civilization does not go to war with itself (regions against regions) then energy must continue to flow at some rate. Unless and until rationing sets in, so long as any open market in oil exists AND the global production continues to fall below growing demand we will see rising prices, even in a deflationary scenario.
To alter this we either need increased supply (which is not going to occur) or decreased demand. And despite the observations of the deflation watchers like Mish and others, there has as of yet been no deflationary crash. In other words, so long as the markets continue to ignore the crackup in the financial sector, oil cannot do anything but continue its general upward trend.
Now I agree that in the event of a 1929 style deflationary collapse we would see massive decrease in demand. But are we going to get that? Or are we going to muddle along for the next several years in some financial no-man's land?
Here's a point for people to ponder. The 2001 tech stock crackup was supposed to be "the big one" but the powers that be managed to hide that with a convenient "war on terror" and yet another bubble. Everyone betting on a deflationary collapse now is making the same assumptions but TPTB have proven remarkably resilient in their abilities to rape the planet and its population. Why do you think they won't get away with this again? We had already passed into the realm of fairy tale numbers back in the 2001 crash. This crash is just more fairy tale numbers. And they have a ready proxy waiting in the wings for the next bubble - carbon credits. Note that I am not a global warming denier, much to the contrary, I am quite a believer in global warming. But I don't think that these sorts of policies and actions are actually going to solve anything. Rather, these policies, like carbon credits are more akin to exploiting a legitimate crisis for gain by the elites.
Likewise, given that $750 trillion in derivatives debt was preposterous to begin with, yet we had it, I can clearly see the existing population buying into an even bigger bubble based on something else. Now I am not predicting this will occur but I am warning many of you that betting on a purely deflationary fast collapse ala 1929 is not a guaranteed bet. I fully intend to speculate in oil futures so long as it seems viable to me. And that is the decision that you must make - does such a speculative action seem viable to you at this time? No one can answer that for you except you. Right now global civilization is in no-man's land. Rational thought was abandoned long ago in favor of rationalizing thought. All that matters now is the race to some illusory goal and right before people reach it, the goalposts will be moved again. This technique has worked for a long time for the established families at the top of the world order and they won't abandon it now even in the face of global catastrophe.
“Should We Rethink Fiscal Policy?” - Economists are remarkably slow to embrace the idea of more aggressive fiscal policy, despite growing evidence that it is sorely needed.
3 hours ago