One for the economists among us: Resource scarcity. Is inflation locked in for the foreseeable future?

[El Presidente]

Is it just me, or does it feel  that we entered Covid through one dimension and exited it through a completely different one?

Or is it that we just ignored the fundamentals and Covid just lit the fuse? 

We have been reading about resource scarcity for the better part of a decade, but all the chickens appear to be coming home to roost. 

Energy, food, metals, water. 

The Ukraine/Russia war has played a part in the case of the first two.  Diesel prices in this part of the world has spiked 30% in the past 6 months. Every freight truck in the country is diesel. Winter is coming to Europe and there must be some very nervous politicians, particularly those who closed/are closing nuclear power plants. Global grain shortages due to the war has seen a flow on effect in the production and pricing of other staples such as eggs/beef. 

Where is the downward pressure on pricing when it comes to these core global necessities?  The politicians believe they will have it under control next year. 

What am I missing? 

[NSXCIGAR]

No idea but something is definitely wrong everywhere. Not only has heating oil doubled in price in the US but they're preparing for a shortage in the northeast:

https://www.nrcc.org/2022/10/24/bloomberg-new-york-new-england-ration-heating-oil-even-before-peak-winter/

As far as agriculture, fuel is needed for fertilizer. No fuel, no fertilizer, no food, no heat. 

[treberty]

The last 2-3 years have just been a global perfect storm. Perhaps humanity would have fared better 50 years ago - who knows.
However, it appears unlikely that things will ever get back to what they were in 2019.
Fun times!

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[Jackdani7401]

In the USA, a lot of our inflation had to do with the fact the the government was paying people more to stay home and not work, then what businesses were willing to pay for wages. Businesses had to increase wages in order to attract employees, thus beginning the trickle down effect. The new administration also eliminated the tax penalties to companies that sourced materials from outside the US, decreasing jobs, but not decreasing prices because executives just pocketed the additional profits. The storm was not good, but the aftermath is very heavily driven by politics and the ones who suffer the most are the ones who can’t afford to. 
 

Some parts of the world are able to be independent and not rely on other countries for goods and/or resources…other countries are not so lucky and will always be at the mercy of suppliers/foreign aid. 
 

just my not highly educated $.02😂😂

[MrBirdman]

Energy touches everything, especially food, and the drivers of those prices have largely been geopolitics and artificial supply constraints (producers/cartels are not ramping up supply so they can keep the prices and profits high). It was always a stupid decision to move away from nuclear power before other renewables were ready for prime-time. Doubly stupid in countries that import energy from geopolitical adversaries. I have trouble feeling bad for Germany on this score; for such a smart country they really take their stupid pills on nuclear energy.

There are obviously myriad other drivers of inflation. I'll just add one that gets overlooked - corporate consolidation. COVID arrived at the end of a long period where multiple industries underwent considerable consolidation of market power. When COVID hit, firms got a taste of how far they could really push pricing and get away with it. Now, without robust competition, they're able to get away with it. This is what you get from 30 years of antitrust regulators in the US being asleep at the wheel. 

Some economists blame wage growth, but that is a chicken-egg problem and I'm not sure it's so clear cut. Workers are demanding and expecting higher wages in part because of inflation. And the idea that we should gear our economic thinking that way, such that wage growth is a problem - after decades of stagnation - is entitled and cynical. If the whole appeal of capitalism is the most wealth for the most people, we can't start freaking out once the people actually start getting some. 

Goods outside necessities, like cars etc boomed due to supply constraints and the fact that the wealthiest people did quite well from the pandemic. 

Whatever I might do to help the situation (like increasing and unifying corporate tax rates across borders; expanding and enforcing antitrust laws), the most likely outcome is that central banks inflict whatever pain is necessary to get inflation down. 

[El Presidente]

4 minutes ago, MrBirdman said:

Whatever I might do to help the situation (like increasing and unifying corporate tax rates across borders; expanding and enforcing antitrust laws), the most likely outcome is that central banks inflict whatever pain is necessary to get inflation down. 

Brett, I don't disagree with you. The central bank approach has political consequences......and quite a few are already treading interest rate increases as if walking on egg shells. 

So in a nutshell (no chance I know!)

How does raising interest rates stifle inflationary pressure from energy and basic food increases?  Discretionary spending sure. Essentials?   

It really is caveman economics 

[Chas.Alpha]

I can certainly reply without breaking forum rules: American oil companies are reaping RECORD Profits during this mess... The capitalist model that the rich get richer seems to be in full swing.

[DaBoot]

The payoffs government officials receiving are bringing pain to the west. 
why would you outsource items needed to survive? Energy, food??? No one with half a brain for the care of their citizens would do this.

the farm bill in the states subsidizes items like corn, to turn into high fructose corn syrup, instead of real food( beef, chicken, veggies) because the soda and chip companies lobby( payoff) Washington.

why would you ban drilling for oil and gas in your own country? Close a nuclear facility keeping energy costs low? Or say building a water retention dam or lake in a drought area is too expensive?

 

 

[SpecialK]

11 minutes ago, DaBoot said:

why would you ban drilling for oil and gas in your own country? Close a nuclear facility keeping energy costs low? 

 

I wonder the same thing.. We have it they just won't let us use it... I also believe we won't have the electrical capacity for all the electric cars unless we ramp up nuclear.

On a funny note they are re-opening a mine here for Cobalt in Electric Car Batteries.. an Australian company is heading it up.. the Enviro's are pretty upset about it... but they want the electric cars !... 

Something has to give... you can't have your cake and eat it to.. 

[BoliDan]

Politicians will keep it under control, only because that is what will get them re-elected. There's no real political solution other than incentivizing innovation in fuel efficient modes of transportation or renewables with tax breaks or subsidies. Central banks and the fed solutions are garbage. 

Innovation is always the answer, but the politicians thwart real innovation because the perpetrators line the pockets of the politicians, at least in the US.

[El Presidente]

9 hours ago, SpecialK said:

On a funny note they are re-opening a mine here for Cobalt in Electric Car Batteries.. an Australian company is heading it up.. the Enviro's are pretty upset about it... but they want the electric cars !... 

I believe my youngest son Tom was involved in assessing the feasability of that project 

[Chas.Alpha]

9 hours ago, SpecialK said:

I wonder the same thing.. We have it they just won't let us use it... I also believe we won't have the electrical capacity for all the electric cars unless we ramp up nuclear.

On a funny note they are re-opening a mine here for Cobalt in Electric Car Batteries.. an Australian company is heading it up.. the Enviro's are pretty upset about it... but they want the electric cars !... 

Something has to give... you can't have your cake and eat it to.. 

Ok, deep drilling in the GOM ended costing BILLIONS in taxpayer dollars after Deep Water horizon. Fishing communities were decimated. This isn't news, I lived there. Gulf coast still recovering from that F*ckup...

 

8 hours ago, El Presidente said:

I believe my youngest son Tom was involved in assessing the feasability of that project 

GO TOM!!!

[El Presidente]

8 hours ago, Chas.Alpha said:

GO TOM!!!

...he took after his mother's side 

[Chas.Alpha]

Just now, El Presidente said:

...he took after his mothers side 

Hi Mate! 10 minutes to bedtime!!! 😙

[SpecialK]

23 minutes ago, El Presidente said:

I believe my youngest son Tom was involved in assessing the feasability of that project 

the Aussie company is Jervois Global Ltd. 

[NSXCIGAR]

9 hours ago, Chas.Alpha said:

I can certainly reply without breaking forum rules: American oil companies are reaping RECORD Profits during this mess... The capitalist model that the rich get richer seems to be in full swing.

That's not exactly accurate. The oil companies have actually been operating at a net loss over the last 5 years on average. The higher than normal profits this year are mainly due to profit taking as future investment in fossil fuels are looking less and less attractive as governments put more pressure on them. Money that doesn't get reinvested moves into the profit column and no investments look attractive right now. 

8 hours ago, Chas.Alpha said:

Ok, deep drilling in the GOM ended costing BILLIONS in taxpayer dollars after Deep Water horizon. Fishing communities were decimated. This isn't news, I lived there. Gulf coast still recovering from that F*ckup...

The reason there's so much drilling in dangerously deep water is because there are tremendous restrictions on drilling in shallower water closer to shore. Pushing the rigs further offshore into deeper waters actually increases overall risk. 

[JohnnyO]

Prez...Record profits for all that are still in business for consumable goods. Diesel is about $1.50/gal more than gasoline here in the US, where typically it was 25-30 cents more pre-Covid. In the US, distributors of consumer goods don't want to pay US truckers so they are using Mexican drivers that work for 1/3 of traditional mileage rates. Greed is your answer and it has no control. We are trending for a raise in interest rates to 20-25% like they did in the 80's. Corporations can't borrow $, people in general can't afford those rates. No growth, jobs disappear, companies shut down. With a wave of a magic wand inflation goes away. On the way a lot of people get hurt, that's your next bubble. Class dismissed. John

[Namisgr11]

In the US, at least, energy prices have been on the decline since peaking in July, housing prices are declining owing to the reduced demand coming from higher mortgage rates, retail prices are declining as supply chains have re-opened in the sector and the Walmarts, Amazons, and big box stores are flooded with product needing to be moved, gold and crypto prices are down substantially from the start of the year.  The US now leads the world in oil production, with 2022 levels exceeding 2021 production by some margin and 2023 expected to be a record year for output.  Food and agriculture are the categories still with prices rising at a double digit annual rate.  And, as mentioned already, the war in Europe is largely driving the continuing inflation in these two categories, including underlying shortages in feed and fertilizer.  So I don't see the recent surge in the inflation rate as being something systemic to the US economy or liable to persist anywhere near current levels as we go through 2023 and beyond.  The days of artificially low interest rates are over, so long as the Federal reserve doesn't revert back to printing money excessively like it did after 2008 and 2020.

It's a weird time for the US economy.  Unemployment remains historically low, and initiatives for infrastructure and revenue collection from tax cheats would further charge the nation's economy and the federal balance.  Danger lies in interest rate hikes - too high too fast, and we may well swing into a difficult and non-mild recession.

Supply of adequate drinking water is an entirely other resource issue.  In many parts of the world, with little reason to see any relief.

[MrBirdman]

14 hours ago, El Presidente said:

How does raising interest rates stifle inflationary pressure from energy and basic food increases?  Discretionary spending sure. Essentials?   

It really is caveman economics 

I entirely agree - there are much better solutions, but they all require political action. The central bank moves may have significant political consequences but they are independent agencies specifically so that they can act when the political will for more sensible solutions is lacking. 

[Cairo]

15 hours ago, BoliDan said:

Politicians will keep it under control, only because that is what will get them re-elected

Good luck to them.

Inflation has rules of its own--it is like a wildfire.

What happens is that once it gets started businesses and unions will demand pricing that reflects their cost structure.

In the US, for example, government programs like Social Security and Food Stamps also have their benefits increased based on the economic data.

It can take many months and sometimes even years for price increases to flow all the way through the economy.

One of my favorite (very old) essays on the supply chain:

https://fee.org/resources/i-pencil/

The Fed can raise interest rates which will reduce borrowing--but that is like spraying the wildfire with a garden hose.   It does work--but very slowly.

[BoliDan]

3 hours ago, Cairo said:

 

The Fed can raise interest rates which will reduce borrowing--but that is like spraying the wildfire with a garden hose.   It does work--but very slowly.

And increase poverty in the short term. Especially since national savings is in the red and accessing wealth will be more difficult.

Microeconomic adjustments usually show to work in developing countries because they are starting for square one. A developed nation with an already established economy will be interesting to see. I suppose it somewhat worked for the PIIGS in the EU. But they also had an enormous support system 

[ReturnFreeRisk]

Gotta keep inflation long term at around 2% or lower if you want a stable society. Have to keep interest rates low since major DM countries/societies binge on debt. Completely reorienting supply +demand curves simultaneously during covid and many absurd interventionist policies trying to compensate exacerbated already high price inflation. Monetary inflation was out of control prior to lockdowns. The price inflation toothpaste is squeezed out of the tube, good luck getting it back in there. Governments, politicized central banks wont induce the pain of long term high rates to help push it back in because of re-election. So say goodbye to more of the middle class, and welcome more Developed Markets to Emerging Market status. Lots of pain to come in this game going forward, makes feel like someone’s just going to flip the table over on it soon…


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[NSXCIGAR]

1 hour ago, ReturnFreeRisk said:

The price inflation toothpaste is squeezed out of the tube, good luck getting it back in there

Yeah, I always find the claim "transitory" inflation odd. Once there's inflation it's there forever unless you have deflation which central banks will never allow. 

Interesting fact: for most of the 19th century the US experienced a very mild deflation. Prices fell around 1% per year for almost all goods and services. . 

[...]

I wonder how many people are aware of the level of subsidizing happening in the US for oil companies... 

[joeypots]

World population, 1958,  the year I was born, 2,925,686,705.

World population today, 7,836,000,000.

I think the elephant in the room is population. Productivity gains kept up with cheap money for more than ten years in the USA. In a globalized world of commerce I suspect we won’t be able to keep up with demand given the number of people who need food, clothing, and shelter. Any disruption of supply will ripple through markets like never before and, as many have pointed out, monetary policy has few tools to deal quickly with the situation.