Fuel Prices Climbing

[RandFan]

I'm against drilling in ANWR but not for the usual reasons. I could give a rat's 4ss about the Porcupine Caribou (although I think drilling would actually increase their numbers but I digress). I'm against it because it's there and its ours and we don't need to use it at the moment. I think it is a rather good insurance policy -- a hedge against the peak-oil/oil-war/embargo/other scenero bets.

It's in the bank for a rainy day. Let's keep it that way.

I do support geological surveys to establish, to the greatest cost-effective degree, the amount that exists. I also think the results of those surveys are a matter of national security and should be classified. <---note to note that is probably already the case.

Good post. I hadn't considered that point.

 

[shanek]

Obviously, you are distinguishing between inflation and what the dollar is losing compared to euro?

Reread what I wrote above:

It all depends on how you measure it. Again, there's no perfect measure of inflation. And just as the price of (say) gas going up doesn't mean inflation any more than (say) the price of computers going down means deflation, but rather the overall prices (and that's not even a really good measurement there, because technoligcal advances tend to move real prices down), you can't just look at the dollar vs. the euro to see if there's overall inflation. It's really a big picture kind of thing.

 

[Bjorn]

Reread what I wrote above:

You can't just look at the dollar vs. the euro to see if there's overall inflation. It's really a big picture kind of thing.

Right. That's why I was confused when I pointed out that the dollar fall compared to euro was a strong contributing factor to raise in the nominal price (in addition to the inflation), and you answered:

Um, that's what inflation is; the dollar is worth less.

However, we now seem to agree that inflation and currency fluctuation are two different things?

This was in the news a few weeks ago:

The Federal Reserve on Wednesday took a step closer to setting a formal inflation objective, releasing forecasts that show it expects inflation to remain at 1½-1¾ per cent for the next two years.

Clearly, if inflation is to "remain" at such a level (indicating that it is the present one) the decline in the dollar value has not been part of the equation?

 

[shanek]

However, we now seem to agree that inflation and currency fluctuation are two different things?

Not really. Currency prices are one measure of inflation. But you have to compare it to the currency market as a whole, not just a single currency.

Remember, we're talking about a chaotic system here. Particularly in the short run.

 

[Bjorn]

Not really. Currency prices are one measure of inflation.

But as I pointed out, it certainly isn't Greenspan's way of measuring it, and I have yet to see a definition that does.

If we imagine that the US imported 10% of it's consumer goods and the currency fell 50%, those 10% of the goods would most likely become twice as expensive, driving inflation up to 5% if consumption stayed the same.

In other words, the fall in the currency is influencing inflation, but is in no way defining it. Again, my objections are to your statement:

Um, that's what inflation is; the dollar is worth less.

 

[shanek]

But as I pointed out, it certainly isn't Greenspan's way of measuring it, and I have yet to see a definition that does.

I have no idea how the Fed is calculating such a low inflation rate. The two most accepted metrics are CPI and the GDP Deflator, and as I showed they show inflation over the last 5 years being 2-2½% annually.

If we imagine that the US imported 10% of it's consumer goods and the currency fell 50%, those 10% of the goods would most likely become twice as expensive, driving inflation up to 5% if consumption stayed the same.

Well, other than inflation, the only reason a currency can fall in relation to the yen, euro, etc. is if there's not as much demand for it. Which would mean there's not as much demand for American goods as before. This would mean that, in relation to the yen or the euro or whatever, American goods are now cheaper for those countries to buy. This effect is really just supply and demand, and doesn't really have anything to do with inflation or deflation.

Of course, the reason it would be doing so is that some other country is now providing those goods at a cheaper price, and so the system is trying to obtain equilibrium. The reduction in the value of the dollar across the board, in realtion to all other currencies, would be an indicator of inflation since that metric would include the value of the currencies in the countries that were competing with American goods.

 

[Bjorn]

I have no idea how the Fed is calculating such a low inflation rate. The two most accepted metrics are CPI and the GDP Deflator, and as I showed they show inflation over the last 5 years being 2-2½% annually.

And whichever you pick it's still far from the rate of the fall in dollars. In other words, the fall in the dollar value "is" not inflation - which you in fact say below:

Well, other than inflation, the only reason a currency can fall in relation to the yen, euro, etc. is if there's not as much demand for it.

Or not much faith in it, which is basically the same. Who wants to sit with billions of dollars if they think they'll fall further all the time? Sell dollars, buy euros, and for goodness' sake start paying me for my oil in euros, not those depreciating greenbacks.

Which would mean there's not as much demand for American goods as before. This would mean that, in relation to the yen or the euro or whatever, American goods are now cheaper for those countries to buy. This effect is really just supply and demand, and doesn't really have anything to do with inflation or deflation.

Which was my point.

On the other hand, the dollar itself is a commodity, preferred for decades by many countries as a big chunk of their currency reserves. However, when faith weakens .... Greenspan said this a few years ago:

It has become a general principle that monetary authorities reserve only those currencies they believe are as strong or stronger than their own. Thus, central banks' reserve balances except in special circumstances hold no weak currencies of which I am aware, other than standard transaction balances that are not viewed as stores of values.

 

[shanek]

Or not much faith in it, which is basically the same. Who wants to sit with billions of dollars if they think they'll fall further all the time? Sell dollars, buy euros, and for goodness' sake start paying me for my oil in euros, not those depreciating greenbacks.

I wouldn't say it was the same. There's a difference between a drop in demand for the goods and services and investments in a country and a drop in demand for its currency, albeit a subtle one, and it's easy to look at them at the same thing.

If we produce widgets, and another country starts making widgets cheaper, resulting in us selling fewer widgets, then demand is going to drop even though the opinion of our currency never entered into it.

What you are describing, which is essentially not wanting to hold on to currency because you're worried it won't be worth as much, is essentially how people react to inflation, or at least the possibility of it.

See the difference?

On the other hand, the dollar itself is a commodity, preferred for decades by many countries as a big chunk of their currency reserves. However, when faith weakens .... Greenspan said this a few years ago:

And he's basically right.

 

[Bjorn]

So we finally agree that "the fall in the dollar value is not inflation"?

 

[Brown]

I remember well the very first time in my life that I paid $20 for a tank of gasoline. At the time, I thought it was steep.

But during the "administration" of little Bush:
I paid $25 for a tank of gasoline for the first time in my life.
I paid $30 for a tank of gasoline for the first time in my life.
I paid $35 for a tank of gasoline for the first time in my life.
I fully expect that, the next time I go to the pump, I will be pretty darn close to $40 for a tank.

(In case you're wondering, I've driven three cars in that time, all made by the same manufacturer and all having the same size tanks. The latter two cars, however, used premium fuel, which is more expensive than regular fuel.)

 

[shanek]

So we finally agree that "the fall in the dollar value is not inflation"?

No, inflation is the fall in the dollar's value. That's pretty much the definition of inflation. But that's different than saying that if the value of the dollar in relation to the euro falls 20% then inflation must be 20%.

 

[Bjorn]

No, inflation is the fall in the dollar's value. That's pretty much the definition of inflation. But that's different than saying that if the value of the dollar in relation to the euro falls 20% then inflation must be 20%.

You seem to go around in circles here:

B: I wasn't thinking inflation, just the fact that the dollar is worth a lot less compared to other currencies than it was five years ago.

S: Um, that's what inflation is; the dollar is worth less.

B: But he inflation can be equal in two countries and still one of the currencies might lose compared to the other.

S: It all depends on how you measure it. Again, there's no perfect measure of inflation ..... you can't just look at the dollar vs. the euro to see if there's overall inflation

B: So what was the inflation in the US during the last five years?

S: Say two to two-and-a-half percent.

B: During the same time, dollars have declined at least 35% compared to euros. Obviously, you are distinguishing between inflation and what the dollar is losing compared to euro?

S: Reread what I wrote above. You can't just look at the dollar vs. the euro to see if there's overall inflation

B: We now seem to agree that inflation and currency fluctuation are two different things?

S: Not really.

B: The fall in the currency is influencing inflation, but is in no way defining it. Again, my objections are to your statement: Um, that's what inflation is; the dollar is worth less.

S: other than inflation , the only reason a currency can fall in relation to the yen, euro, etc. is if there's not as much demand for it .....

American goods are now cheaper for those countries to buy. This effect is really just supply and demand, and doesn't really have anything to do with inflation or deflation.

B: Which was my point.

So we finally agree that "the fall in the dollar value is not inflation"?

S: No, inflation is the fall in the dollar's value.

Aren't you contradicting yourself?

 

[shanek]

You seem to go around in circles here:

Aren't you contradicting yourself?

No, I'm just trying to explain a distinction you don't seem to get.

 

[Oleron]

Obligatory UK whine coming up:

The USA still has petrol prices that countries like the UK dream about. $2 per gallon? In the UK we pay £0.83 per litre.

That's about $6.50-7.00 per gallon. Around 80% of it is tax.

Mind you, the advantage of having such high taxes is that we hardly notice when the price of the actual oil goes up...

 

[Bjorn]

No, I'm just trying to explain a distinction you don't seem to get.

Yeah - the distinction between

"other than inflation .. a currency can fall .. if there's not as much demand for it" and

"inflation is the fall in the dollar's value"?

 

[shanek]

Yeah - the distinction between

"other than inflation .. a currency can fall .. if there's not as much demand for it" and

"inflation is the fall in the dollar's value"?

Sigh....once again, the first one refers to the value of a particular currency exchange; i.e., dollars to euros. The second refers to the actual value of the currency across the board. It's the difference between nominal and real value.

 

[Rob Lister]

Edit: opps! wrong thread. I don't know how I did that.

 

[Bjorn]

Sigh....once again, the first one refers to the value of a particular currency exchange; i.e., dollars to euros. The second refers to the actual value of the currency across the board. It's the difference between nominal and real value.

The dollar is declining across the board.

You seem to disagree with economists:

We as a country might not like it if the dollar's decline went far enough that it began to push up inflation in the economy as a whole. We have not seen that. Inflation is under control.

Rising energy prices and a falling dollar would reinforce each other as in the 1970s and raise the spectre of renewed stagflation.

C. Fred Bergsten has been director of the Institute for International Economics since its creation in 1981. He is chairman of the "Shadow G-8," which advises the G-8 countries on their annual summit meetings. He was chairman of the Competitiveness Policy Council, which was created by Congress, throughout its existence from 1991 to 1995 and chairman of the APEC Eminent Persons Group throughout its existence from 1993 to 1995. He was assistant secretary for international affairs of the US Treasury (1977-81); assistant for international economic affairs to the National Security Council (1969-71); and a senior fellow at the Brookings Institution (1972-76), the Carnegie Endowment for International Peace (1981), and the Council on Foreign Relations (1967-68). He is the author, coauthor, or editor of numerous books on a wide range of international economic issues.

Kenneth Rogoff:

But I think in the end right now it's a good thing for the dollar to decline in value. I think it will help reduce the trade deficit. I don't see any consequences in terms of internal inflation in America that are very major.

Professor of Economics, Harvard University, September 1999 – present; Thomas D. Cabot Professor of Public Policy, January 2004 – present.
Chief Economist and Director of Research, International Monetary Fund, 2001–2003.

Director, Harvard Center for International Development, 2003–2004.

Professor of Economics and International Affairs, Princeton University, 1992–94; Charles and Marie Robertson Professor of International Affairs, 1995–1999.

 

[shanek]

The dollar is declining across the board.

Yes, and I gave you the numbers showing how much.

FWIW, I don't trust any economist that ever uses the words "under control" to describe inflation. It's not as if we don't know what causes it...

 

[Bjorn]

I don't trust any economist that ever uses the words "under control" to describe inflation. It's not as if we don't know what causes it...

Personally I trust Bergsten, advisor to the G-8 countries, and Rogoff, Professor of Economics, Harvard University, more than ShaneK.