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Collapsing prices in an inflationary environment

Scorpio

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Collapsing prices in an inflationary environment​


September 13, 2021
Over the past four months, in parallel with spectacular gains in the prices of coal and natural gas prices there have been spectacular declines in the prices of lumber and iron-ore. The following charts show the 70% crash in the lumber price from its May-2021 peak and the 40% crash in the iron-ore price from its July-2021 peak.
lumber_130921
ironore_130921
A common argument against there being a general inflation problem is that the large rises in commodity prices are due to temporary market-specific supply issues, leading to large price declines as soon as the supply issues are resolved. The plunges in the prices of lumber and iron-ore can be cited to support this argument.
There is an element of truth to this line of thinking. However, the same argument could have been made throughout the 1970s, in that every large commodity-price rise during that decade could be put down to a market-specific supply issue.
As long as the inflation doesn’t become ‘hyper’, that is, as long as the value of money doesn’t collapse relative to everything, a large and rapid rise in the price of a commodity will result in additional supply and/or reduced demand, eventually leading to a large price decline. This sequence of events played out in full in the lumber and iron-ore markets over the past 12 months and by the time we get to the middle of next year it likely will have played out in full in the natural gas and coal markets.
The clue that the price action has monetary roots is in its frequency, that is, in the number of markets that are experiencing huge price run-ups. Each huge price run-up in isolation can be put down to market-specific supply constraints, but when the same thing happens in so many different markets at different times within a multi-year period then we can be sure that the root cause is linked to the monetary system itself.
In the current environment, the root cause is the combination of rapid monetary inflation courtesy of the central bank and a huge increase in government deficit-spending. Thanks to the Fed, the supply of US dollars is about 50% greater today than it was two years ago. Thanks to the government, the newly-created money did a lot more than elevate the prices of financial assets.

 

RebelYell

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Collapsing prices in an inflationary environment​


September 13, 2021
Over the past four months, in parallel with spectacular gains in the prices of coal and natural gas prices there have been spectacular declines in the prices of lumber and iron-ore. The following charts show the 70% crash in the lumber price from its May-2021 peak and the 40% crash in the iron-ore price from its July-2021 peak.
lumber_130921
ironore_130921
A common argument against there being a general inflation problem is that the large rises in commodity prices are due to temporary market-specific supply issues, leading to large price declines as soon as the supply issues are resolved. The plunges in the prices of lumber and iron-ore can be cited to support this argument.
There is an element of truth to this line of thinking. However, the same argument could have been made throughout the 1970s, in that every large commodity-price rise during that decade could be put down to a market-specific supply issue.
As long as the inflation doesn’t become ‘hyper’, that is, as long as the value of money doesn’t collapse relative to everything, a large and rapid rise in the price of a commodity will result in additional supply and/or reduced demand, eventually leading to a large price decline. This sequence of events played out in full in the lumber and iron-ore markets over the past 12 months and by the time we get to the middle of next year it likely will have played out in full in the natural gas and coal markets.
The clue that the price action has monetary roots is in its frequency, that is, in the number of markets that are experiencing huge price run-ups. Each huge price run-up in isolation can be put down to market-specific supply constraints, but when the same thing happens in so many different markets at different times within a multi-year period then we can be sure that the root cause is linked to the monetary system itself.
In the current environment, the root cause is the combination of rapid monetary inflation courtesy of the central bank and a huge increase in government deficit-spending. Thanks to the Fed, the supply of US dollars is about 50% greater today than it was two years ago. Thanks to the government, the newly-created money did a lot more than elevate the prices of financial assets.

This article does not make a convincing argument. Which says nothing either way about whether or not its conclusion is correct.
 

Scorpio

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not sure about that, as he states those who claim inflation is transitory and no big deal point at market run ups and collapses for evidence, when point of fact is it is continuing as it moves from one to the next

then, which is missing as you say, is that when these markets do come down, they only come down to a price that is much higher than prior to the run up.

for instance, that lumber up and down has left lumber at a far greater number than normal for this time of year

corn/beans same

etc

so in the end, even though those markets have supposedly collapsed, their resting place contributes to the much higher prices we are seeing across the board
 

the_shootist

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not sure about that, as he states those who claim inflation is transitory and no big deal point at market run ups and collapses for evidence, when point of fact is it is continuing as it moves from one to the next

then, which is missing as you say, is that when these markets do come down, they only come down to a price that is much higher than prior to the run up.

for instance, that lumber up and down has left lumber at a far greater number than normal for this time of year

corn/beans same

etc

so in the end, even though those markets have supposedly collapsed, their resting place contributes to the much higher prices we are seeing across the board
Yeah, those charts look more like prices are 'normalizing', not collapsing but, to Scorp's point....where will the new 'normal' prices end up settling?
 

Scorpio

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where will the new 'normal' prices end up settling?

yep, as anyone who argues against inflation is being disingenuous IMO,

the massive monetary printing, which has only went exponential, demands reconciliation in some manner on the books,

and to do that, it has to manifest itself throughout the economy,

it is
 

Casey Jones

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Collapsing prices, equal collapsing demand.

In the case of lumber and raw materials, it's because contractors couldn't effect construction with the previous bubble-prices and still find buyers for the finished product/owners who agreed to the work at then-current estimates.

In an open market, high prices cure high prices. This is the result of high prices - no buyers for the product.

If the lessened demand stays, it's because, in this psychotic era, people are choosing NOT to buy homes, home improvements, other products involving construction. Why would they, when their jobs are threatened, when taxes are experiencing a blowoff, when the need for a forced relocation, e.g. to get away from psychotic government force-jabbing on kids...when the need to get outta Dodge is a very-real potential?

Instability doesn't lend to home investment. Money is going elsewhere.

Even in a manipulated Command/Control economy, free-market pressures remain.
 

Joe King

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or instance, that lumber up and down has left lumber at a far greater number than normal for this time of year


If 2x4's went from $3 to $5.50 and just stayed there, everybody buying 2x4's would bitch about it.
....but run the price up to $15 for a 2x4 and then bring it back down to $5.50, and most people are happy with the price.
 

Voodoo

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Demand clearly collapsed. We have very strong Inflationary and Deflationary things going on all at the same time. This is probably the most Complex economic point in history. Fun times.
 

Casey Jones

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Demand clearly collapsed. We have very strong Inflationary and Deflationary things going on all at the same time. This is probably the most Complex economic point in history. Fun times.
It's because of the confusing and re-defining of what were basic economic terms and concepts.

Use Classical (Austrian School) Economics as a guide, and what is happening makes sense. In terms of economic laws, not in terms of logical behavior of government and banking elites.
 

EO 11110

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the author is arguing for (what should be) common knowledge

there is always a mix of prices going up/down for the various goods/materials. what matters is the aggregate

beaten deflationsts like to do stuff like this --- anybody remember their laughable bi-flation cope that they tried to sell?
 

BigJim#1-8

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Whatever one needs or wants, the price goes up, whatever one doesn't need/want just doesn't go up as much.
 

RebelYell

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not sure about that, as he states those who claim inflation is transitory and no big deal point at market run ups and collapses for evidence, when point of fact is it is continuing as it moves from one to the next

then, which is missing as you say, is that when these markets do come down, they only come down to a price that is much higher than prior to the run up.

for instance, that lumber up and down has left lumber at a far greater number than normal for this time of year

corn/beans same

etc

so in the end, even though those markets have supposedly collapsed, their resting place contributes to the much higher prices we are seeing across the board
Remember I didn't say that there wasn't inflation, just that this guy didn't make a convincing case. He basically seems to be saying that one commodity running up and down might be a transitory supply chain problem, whereas if it happens to a lot of commodities in a relatively short period of time then it's not a supply chain problem.

That's just not true. Bad supply chain problems could affect the price of absolutely everything at the same time, and those prices would decline again after the problems are resolved. This is exactly what happens after a hurricane or a flood for example.

So his argument is BS.

BUT that doesn't mean there isn't persistent inflation. There may well be. Just that he hasn't proved it. If average prices of everything end up higher when the supply chain problems are resolved then yes - that's inflation.

It is also quite possible that the "supply chain problems" themselves are not transitory. I don't fully understand what's going on with supply chains right now, or why shipping is so expensive and container ships are backed up out the wazoo at every port in the country. And not understanding the causes means I am unable to predict when, or even if, they will be resolved. Heck I don't even know if there actually are any supply chain problems or whether that's just a another lie as well - and in fact we are seeing inflation pure and simple and "supply chain problems" are just a propaganda cover story.
 

Joe King

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What happened to the inflationary death spiral ?

 

RebelYell

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What's yer gut tell ya?
Actually really don't know on this one.

I don't think the government can increase the amount of money chasing goods (i.e. money supply x velocity) without MMT. QE won't do it because it slows velocity more than it increases money supply. This is a marginal product of debt thing, the theory makes sense, and there's plenty of evidence to suggest that this is the case. So I don't believe "money printing" is the cause of rising prices.

However government action can cause less goods to be produced which would also cause prices to rise. And I think this is exactly what is happening. Subsidies keeping workers at home are one example of this. Regulations closing small businesses is another, so is sanctions interfering with international trade. Supply chain "issues" would have the same effect, and might also be directly caused by government intervention.

So I do believe that the cause of rising prices is falling production (which may include or even largely consist of supply chain issues), not increased money. The questions to which I don't know the answer are
- the extent to which different factors are contributing to the problem
- whether, when and which of those factors will be resolved and therefore if and when production will recover.

And if government intervention is not going to be scaled back then production will not recover and these "supply chain issues" will not be resolved. That will cause permanent inflation (if we define it as price rises) just the same as an increase in circulating money.

PS It's also worth pointing out that a rise in prices caused by a decline in production might be a scenario where gold and silver don't help much.
 
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Joe King

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I don't think the government can increase the amount of money chasing goods (i.e. money supply x velocity) without MMT. QE won't do it because it slows velocity more than it increases money supply.
In all but very narrow circumstances, velocity means nothing. Anyone waiting for it to go up as a signal for inflation, will in all likelyhood never see it coming.

However government action can cause less goods to be produced which would also cause prices to rise. And I think this is exactly what is happening. Subsidies keeping workers at home are one example of this. Regulations closing small businesses is another, so is sanctions interfering with international trade. Supply chain "issues" would have the same effect, and might also be directly caused by government intervention.
All that plays a part in it too.


So I do believe that the cause of rising prices is falling production (which may include or even largely consist of supply chain issues), not increased money.
That's part of it too, but when we have a situation where at least 25% of all money in circulation was created in little more than the past year, I find it hard to believe that it has had no effect.


The questions to which I don't know the answer are
- the extent to which different factors are contributing to the problem
- whether, when and which of those factors will be resolved and therefore if and when production will recover.
Unless one is very well connected, no one will know the answers to those questions until after they've been resolved.
 

RebelYell

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In all but very narrow circumstances, velocity means nothing. Anyone waiting for it to go up as a signal for inflation, will in all likelyhood never see it coming.
I think you are wrong here. The deflationists are correct on this one. Velocity is directly tied to the ratio of debt capital to land, labor and technology. Past a certain point additional debt, if it increases money suply also directly acts to decrease velocity such that the product of the two declines rather than increases.

And remember that QE is not printing money - it is borrowoing money and for every extra dollar there is an extra dollar of debt. And when the lenders are not willing to increase leverage (or are subsidized to prevent their doing so, or are regulatorily barred from doing so - both of which are currently true) then the amount of money in circulation does not increase. The fed's balance sheet increases, but the money is just sucked out of another part of the economy.

All that plays a part in it too.

That's part of it too, but when we have a situation where at least 25% of all money in circulation was created in little more than the past year, I find it hard to believe that it has had no effect.
I don't think this is true. The problem is that the old definitions of "money" don't hold true - if they ever did - there was always considerable debate over what money actually is/was. When the fed stopped reporting M3 for example, a lot of people got excited and shouty that the fed was hiding something. I don't think they were at all - I think the fed were correct that M3 really wasn't very useful any more. And the people who were screaming that it was still useful were wrong. They were doubly wrong because they should have realized that the fact that M3 was no longer useful was a much more dangerous thing than it still being meaningful and the fed hiding it.

Unless one is very well connected, no one will know the answers to those questions until after they've been resolved.

Maybe. It's probably worth doing some investigating though - it's surprising what you can discover if you dig far enough - I'm just not sure I can summon the time and energy right now.
 

Joe King

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I think you are wrong here. The deflationists are correct on this one. Velocity is directly tied to the ratio of debt capital to land, labor and technology. Past a certain point additional debt, if it increases money suply also directly acts to decrease velocity such that the product of the two declines rather than increase




The fed's balance sheet increases, but the money is just sucked out of another part of the economy.
The fed created trillions over the past 18 months to buy the stuff added to their balance sheet.

25% of all money in circulation was created in little more than the past year,
I don't think this is true.
Don't have to take my word for it. Here it is, straight from the horses mouth.

united-states-money-supply-m2.png

Five year chart showing m2. Source: US federal reserve.

Edited to add: Also, to be clear, it was a 25% increase from the pre-2020 level. The chart clearly shows it.



Maybe. It's probably worth doing some investigating though - it's surprising what you can discover if you dig far enough - I'm just not sure I can summon the time and energy right now.
If you wanna know as much as possible, time and energy is part of the deal. Nothin's for free.
 
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