How To Fix The Economy

[GPaulus]

Show me your "double digit inflation".
I have yet to see a statistic showing such a thing for an economy because of oil price hikes.

Hint: The consumption of energy isn't a large-enough share in any country's economy to produce double-digit inflation.

U.S. inflation rate has been single digit in this crisis.

The only periods in time energy prices became really volatile were in 1974/75oil embargo (quick and short duration) follow by 12% inflation, and 1980/81. follow by deregulation and again inflation. Since that time energy as a commodity has dropped except 1998/2000 Enron and 2006,7,8 OPEC. In the early 1990s we had some of the lowest normalized energy rates in our history and the economy took off. This time things were very different, the FEDs introduced extranalities into the economy, lowering interest rates to compensate and to thwart inflation. Priming the engine with massive stimulus money/projects.

The result of volatile enegy was an implosion and a contraction of the economy and everything lost value. That started an economic collapse and downward spiral --business cut jobs, production of non-essential products ceased, housing dropped, car industry slumped, people on the margin failed to pay their loans, credit cards, utilities, and foreclosures occurred. The banks and credit card companies became the bad guys. But, they were a symptom! And it will happen again if energy continues to move at a rate greater than the inflation rate. In November oil was $77 and now it is 95. How can that be? A 20% increase. Has oil demand risen by 20 percent?

[Fuchs]

In November oil was $77 and now it is 95. How can that be? A 20% increase. Has oil demand risen by 20 percent?

The very question already shows that you have no clue about economic theory. The correct question would have asked for the price elasticity of demand for oil. That's 1st or 2nd semester microeconomics.

You asserted

But when 20 - 30 % swings occur or the prices climb too fast, the markets cannot react quickly enough. The result is usually double digit inflation.

and the graph proves you wrong. There was no double digit inflation in decades despite such crude oil price spikes.

Earlier spikes of the inflation coincide with world wars (and their aftershocks) and earlier recessions (which happen to involve high crude oil prices).

A global or a national economy has many more variables than energy cost and inflation rate. Federal reserve bank policies allowed high inflation (not this time) in the 70's, but not this time. In fact, there were huge deflation tendencies which were counteracted by expansionary federal reserve bank policies - the end result was a moderate inflation.
The whole link between energy costs and overall inflation/economic crisis is rather weak and indirect. Other variables can easily overcompensate the link.


The increasing energy costs of the mid-2000's did not help, but they're not the root of the global economic crisis. Likewise, subprime mortgages and CDOs were merely symptoms.
The crisis was a a correction movement against unsustainable imbalances with lots of secondary effects.
A high crude oil price is easily sustainable, as evidenced by the fact that some economies already pay a high price for crude oil products due to high crude oil-specific taxation.
The corrections of unsustainable imbalances happened at the weak spot of obviously unsustainable resource mis-allocations; distorted housing sectors (market price bubbles). Secondary effects rippled through an unproductive financial sector which had grossly neglected the management of systemic risks.
Finally, financial sector problems and their bandaging led to the fiscal de facto collapse of several states (Iceland and Ireland experienced economic nightmares because of out-of-proportion financial sectors, Greece/Portugal experience(d) fiscal nightmares because of unsustainable fiscal deficits).

High oil prices alone would merely have sufficed to challenge the viability of some products/business models and have caused some adaption processes in economies. In worst case, some countries would have felt a substantial change in terms of trade - comparable in aggregate effect to a changed rate of currency exchange. That's what we saw in 73/74.

Our economic crisis looked VERY differently this time.

[GPaulus]

[QUOTE=Fuchs;115081]The very question already shows that you have no clue about economic theory. The correct question would have asked for the price elasticity of demand for oil. That's 1st or 2nd semester microeconomics.

Let’s go to 3rd semester economics. But before we get there we will talk about externalities, then we can talk about oligopolies. In each case where energy prices increased "wildly" relative to a gradual free-market price increase (price increase because of supply and demand, and price inelasticity), price volatility was caused by a market externality. In 1973, Oil Embargo, in 81, deregulation of energy, in 95-00 (consolidation of marketers) Enron index manipulation, in 2006,7,8 manipulation by commodity speculation.

The ability of this to happen is because of the relative perceived inelasticity of energy. Everything in life has an energy component and if you were to add up the real cost of energy in a delivered commodity and life, you would see what the true impact of volatile energy prices have on an economy. And, because of the relative inelasticity of energy the externalities induce the price swings.

But there are forces greater than the inelasticity of energy. In reality although less elastic than other commodities, load destruction will occurs when a commodity price becomes unstable and overal demand will drop regardless of the perceived inelasticity. We saw this occur in the early 2002/05s within the natural gas industry after Enron. Larger industrial users will switch or discontinue their processes, or close down, or move off shore to lower cost of production areas--they in essence switch (oil fired to coal, natural gas to nuclear, gasoline to natural gas vehicles, etc.) and load distruction (reduced demand) will occur regardless of the elasticity profile.

The primary cause of "wild" price swings in energy has less to do with elasticity and everything to do with a concept known as Oligopoly Markets. These markets act more like Monopolies. Oligopolies have many suppliers (supply) and many end-use buyers (demand). But in between, unlike many other markets, they have few large aggregators, a limited number of refineries, and few marketers to end-use markets. Take Enron for example, they accounted for nearly 80% of the aggregation natural gas market until their demise. In energy, there are many producers--small, medium and very large but they feed their supply into a small number of refinery and/or marketers (the big supplier pipeline gets restricted before it goes to the big end-use demand) that feed the end-use market. These marketers control the major portion of energy that flows into commodity market hubs and the end-use market. This is why volatility of energy prices can swing more than 10% in a few weeks.

What will it take to wake us up to the ever-tightening grip of oligopolies over ever more of our global marketplaces? Even though their power manipulates and warps our production, and our free market system, no one sounds the alarm. Experts go back to their paradigm of supply, demand and price. But and oligopoly market warps the Keynesian model paradigm.

Oligopolies induced volatility and the collapsed of our economy in 2008 did not set off any bells. Nor did the revelation come to the experts addressing the economic collapse. They blamed financial, housing, auto and lending, and anything else they could point at that fit the paradigm. In oil 10 groups account for 90% of all WW retail down-stream sales, with single aggregating companies often capturing more than 75 per cent of particular energy markets. These markets will not act according to second semester economics and our economy will not improve until we control energy prices by control the oligopolies behind it.

[Fuchs]

The variability of prices can also be explained with a bit market segmentation.

Assume 100 demand and 100 supply. 90 of the demand and 90 of the supply are subject to long-term contracts. Demand rises by 5 (at the old price).

This demand increase by 5 is not a 5% increase, but a 50% increase because the short-term market has only a volume of 10.

The effect in this model is an out-of-proportion price spike that gradually subsides as long-term contracts end and their share is temporarily added to the market volume - till finally the demand hike by 5 is really just a 5% hike.

[bourbon]

In November oil was $77 and now it is 95. How can that be? A 20% increase. Has oil demand risen by 20 percent?

The very question already shows that you have no clue about economic theory. The correct question would have asked for the price elasticity of demand for oil. That's 1st or 2nd semester microeconomics.

Gentlemen,

Market fundamentals are less and issue than index speculation, which has driven a premium of 15% by conservative estimates, to as high as 50%. NYMEX recorded record net long positions in crude futures and options. Its paper, just like it was in 2008.

There have been several posts and links in other threads about record commodity prices from excessive speculation.

Note: I should add that chapter four in Matt Taibbi’s book Griftopia explains the 2008 commodities bubble in the simplest terms possible. Taibbi does a superb job of explaining complex financial, political, and economic issues to the lay-reader, with remarkably less vulgarity. This book should be required reading for every American.

[slapout9]

Link to Real News Network interview of Yves Smith from nakedcapitalism.com on the true story of President Reagans economic policies.



http://www.youtube.com/watch?v=0FAZG...&feature=feedu