Other recent articles under: Economics as of Nov 2, 2007
Topic: Economics
Inflation Has Dropped to 0.8%
Random thoughts and looking on the bright side of math, words and economics. by Jahfre Fire Eater
(libertarian)
Friday, November 2, 2007
Pretty neat huh? Here I was all worried about inflation eating away my life-long savings and suddenly, poof. It stopped.
Or did it? What the heck is happening?
I needed a break yesterday at lunchtime so I drove to the convenience store and filled my Jeep's gas tank. Then I went in to buy a yummy corn and whey treat. While I was browsing the snack selection, a woman was paying for her yummy corn and whey products and she suddenly remembered she had also pumped gas. The clerk told her she was lucky because she was the last to get gas at that price. (I was ahead of her in the gas pumping so I got the old, uninflated price too.) He said that the price of gasoline had just gone up 15 cents. Sure enough, when I went back out the pump I had used showed a new price, $3.27. That's what .15/3.12 = 4.8% increase right before my eyes.
We buy groceries at the Vitamin Cottage and we usually buy the same things over and over. I keep the receipts and enter the prices in an excel spreadsheet because I'm an anal kind of person who spends too much time in front of the computer.
Navy Beans have been $1.14/Lb for over a year. No inflation there. I don't enter the fresh produce because even I'm not that anal... :-) I don't have my own produce scale. But over all, we're showing an 8% increase in food prices in one year. There is no meat in that calculation but with less corn being grown as food for cattle I can only assume meat has been increasing on the same rate as eggs, salmon and butter and cheese...close to 12% for these animal products. In one year. Geesh.
How is the government coming up with their low, low rates of 2.6% or less? Oh yeah, silly me, they don't count energy or food or housing. They may start counting housing again soon since home prices are dropping. That will help them keep the official rate down in those low, low numbers where they like them. Besides, fewer people are buying houses now even with interest rates also in the very low numbers so focusing more attention on the houses that are being sold might make everyone think things aren't as bad as they've heard.
Anyway, what got me wondering about this was the Gross Domestic Product numbers that showed pretty decent growth last quarter, about, no, precisely 3.9%. That's decent growth. Or is it? What the heck is GDP?
Here is a really contrived example:
Assuming I had a lawn, which I do not, but if I did, and I cut it myself, there would be no impact to GDP. If I hired a service to come cut my lawn for me and I paid them $30, the GDP would go up by $30. So, GDP is just the sum total of all the money that changes hands over a given period of time.
This past quarter, GDP was nominally at 4.6% but that nominal number is a fake-out because of course, the Federal Reserve prints massive quantities of dollars night and day, each of which make the dollars in our pockets less valuable so the nominal GDP is a fake-out. It has INFLATION baked in.
Speaking of baked, here is another contrived example: If you bought a pizza last quarter for $10 but this quarter the same pizza is $12 should the GDP go up? You are getting the exact same pizza so no, the GDP should be the same. Since even a 3 year old can see one pizza is the same as the next, the government has no choice but to subtract out that inflation effect. They don't want to seem like they are just making stuff up. Right?
In order to compensate for the effect of every dollar becoming worth less and less with each tick of the clock, they subtract out the inflation before telling us with the GDP is. In Q1 they subtracted something like 4.2%, last quarter they subtracted out 2.6%, that very low, low number they like and that they keep by not counting things that go up in price. Yesterday, they subtracted out 0.8% for inflation!! Lucky us, inflation has fallen from 2.6% to 0.8% just like that....unless you buy gas, or meat, or eggs or cheese, or butter, etc.
I'm sure I must be the only one fool enough to actually purchase things that are going up in price. The rest of you must really be enjoying that windfall in your pockets this month. According to the official numbers, you have 1.8% more money to spend. I really need to go the library to read about how everyone is managing to avoid buying things that are going up in price.
The price of gas, heating oil, corn, metals of all sorts (especially gold and silver) and nearly everything that is used to make everything else is going through the roof. I don't think this low, low inflation rate of 0.8% can last given how everything else is getting drastically more expensive. If I were you, I'd take that 1.8% windfall and go buy some gold...unless you are going to break down and buy useless things like food and oil.
In case anyone is wondering why government statisticians would go through all this bother to make the numbers come out looking so good, it is because they are afraid of a word. If they used inflation numbers from my grocery spreadsheet that word would be on everyone's lips, in all the newspapers, in fact, they couldn't hear or utter a sentence without encountering that word so they use math to avoid it. Recession.
I think it is going to be a very popular word for quite some time to come....but the government will avoid it for as long as possible through the magic of numbers. Words and numbers make the world go around...or is that angular momentum and inertia...aaahhh, it really doesn't matter. Here I sit with my Jeep's gas tank full of the cheapest gas I may ever see in the rest of my lifetime and I have no where to go.
In case you missed that last sentence, I slipped in a prediction. I read an article yesterday that said at current consumption rates there is enough oil to last 42 years.
Yeah, like we have any hope of keeping consumption rates at today's levels. China subsidizes their fuel prices to keep them very low and this caused them to show a 40% increase in fuel consumption this year compared to last year...and the rate is accelerating. That 42 years worth of oil at current consumption levels is the maximum. India is also increasing their consumption of oil.
Why are these two countries keeping the price of fuel artificially low through government subsidies? Because they watched what 'fueled' the growth and prosperity in the USA over the past century. Cheap energy.
Cheap energy encourages people to use more and more of it. (Note: Fuel shortages in China have forced them to increase the price recently. For a non-mathematical or graphical explanation of the folly of price controls I recommend Thomas Sowell's Basic Economics or for the slightly more mathematical, Henry Hazlitt's Economics in One Lesson.)
The more energy a people use, the more neat stuff they make. Also, more bad ideas can survive. So even people who are wasting their energy making things that could never exist if fuel was expensive remain in business and make great money.
We taught the Chinese the way to become prosperous and they are doing it. (But not well, or sustainably. They learned how to depress the accelerator but the gear-shift and brakes are apparently not known to them yet. They have many economic-physics relationships to explore the hard way in the near future.)
As well as the world's oil consumption rate increasing, the pumping rate will continuously decrease. The less oil in those wells, the harder it is to suck the rest out, so, each well produces less and less over time.
Contrived example follows:
It is like a wet sponge. When you first set it down it leaks all over the place but then it stops. If you pick it up and squeeze it; more water flows out of it. So it wasn't empty, it just wasn't full enough for the water to run out easily. Well, we don't have a way to pick up enormous oil fields and squeeze that last bit of oil from them so the more oil we pump, the harder it is to get the rest into a barrel.
Oil production peaked over a year ago. (look it up, never take my word for anything!) Many experts think that we'll never see oil production approach that peak again.
Not that producers wouldn't like to pump more. Heck, their oil went from $20 per barrel to almost $100 per barrel in the past 6 years. They would LOVE to pump as much as possible at $100 per barrel...but they can't squeeze the sponge.
Sure, as the price of oil increases, they will spend more and more money finding ways to squeeze the oil out but they can't get it all and even if they could, in 42 years or less it will all be gone. Maybe we should use that 1.8% windfall this month to buy a sturdy pair of walking shoes. Just a thought. Maybe shoes will get cheaper as farmers can't afford corn to feed their cows they will have to kill off great numbers of them. The price of leather may go way down for a while. I'm always looking on the bright side of things.
Here is a bright-side perspective. What if we bomb Iran back to the dark ages and then find out that their big secret isn't that they want to build a nuclear weapon to terrorize Americans to the point they can't concentrate on the politics of Survivor or the intrigue of Dancing with the Stars or the drama of Gray's Anatomy, but instead, their big secret is that their oil fields are nearly dry? (Um, this is no secret, again, look it up.)
What if they really are trying to hurry up and build nuclear power plants while the world is still forking over $100 per barrel of oil because they know once the oil dries up no one is going to lend them a plug nickel for their nuclear power plant construction? What if they are looking ahead to how they will provide food, water and health care for their citizens when their only natural resource, besides sand, dries up? Won't we feel silly!
Do you think President Bush or Hillary or Rudy would ever think that maybe the Iranian oil fields are drying up just like the oil in Texas? No. I don't either. There is no glory in bombing people back to the dark ages unless they are evil.
One more thought. It seems to me that the surest way for a country to be taken seriously and to also receive handouts and even diplomacy from the USA is to first have nuclear weapons. I wonder if the Iranians have noticed that? In any case, they would need the nuclear power before they need the nuclear weapons because the chances of the US starting to fork over Billions to Iran are pretty slim for the next 42 years, at least.
Have a great weekend! I'm off to buy a $10 pizza before it suddenly turns into a $12 pizza with the exact same toppings.
-Jahfre
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The views expressed
in this article are those of Jahfre Fire Eater only and
do not represent the views of Nolan Chart, LLC or its affiliates.
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On oil:
I prefer the analogy of a bottle of soda. Shake it up, then prick a hole in it. The soda that naturally spits out is what we call "light sweet", is easy to get out and cheap. Then, put a straw in the hole when it's done spraying soda, and suck soda out up to the point that the bottle starts to collapse. That's the point we're at now.
A new tech has been developed though that pumps CO2 into the wells to repressurize them so that we can extract further oil. Using this method, if we opened all US oil fields, we could stop all imports of oil except the quantities that we get from Canada and Mexico, for the next 40 years, if the US doesn't increase it's demand for oil. That's the only way that China and India aren't going to squeeze our economy.
