–What will cause the next inflation?

The debt hawks are to economics as the creationists are to biology.

The debt hawks say federal deficit spending will cause inflation. History says they are wrong. There is no post-1971 (end of the gold standard) relationship between federal deficits and CPI. (See: INFLATION) In fact, despite massive deficit spending, the Fed today is most worried about deflation.

Nevertheless, I now believe inflation has become a threat.

In a letter dated October 1, 2010, John Mauldin said:

“John Hofmeister is the former president of Shell Oil and now CEO of the public-policy group Citizens for Affordable Energy. He paints a very stark picture of the future of energy production in the US unless we change our current policies. First, because of the aftereffects of the moratorium. It is his belief that the drilling moratorium will effectively still be in place until at least the middle of 2012. There won’t even be new rules until the end of 2011, and then the lawsuits start.

“Gulf oil production will be down by up to 1 million barrels a day. Imported oil is now 67% of oil usage but will go to 75% by 2012. He thinks crude oil will be up to $125 and gasoline between $4-$5 at the pump. And it will only get worse.

“He describes the problem with the electricity from coal production. The average coal plant is 38 years old, with a planned-for life of 50 years. Our energy production capability is rapidly aging, and we are not updating it fast enough.

“He argues that the fight between the right and the left has given us 37 years without a realistic energy policy, as policy gets driven by two-year political cycles but good energy planning takes decades. There are 13 government agencies that regulate the energy industry, with conflicting mandates that change very two years. There are 22 congressional committees that have some level of involvement and oversight of the energy industry.”

Why is this important for inflation? Because although federal deficits do not correlate with inflation, energy prices do. And if we have the shortages Mr. Hofmeister suggests (a big “if” as oil supply is notoriously difficult to predict), they will translate into higher overall consumer prices. Yes, new oil sources are being discovered daily. And yes, progress is being made in developing alternative energy. But the modernization of huge populations in China, India, Russia and other less developed countries, is sure to increase world oil consumption, massively.

Inflation can be prevented and cured by raising interest rates. But our government is fixated on the false, debt-hawk belief that federal deficits cause inflation. So the political “cure” will be to reduce federal spending and/or to increase federal taxes, either of which, history shows, will devastate our economy.

In summary, the next inflation will come from energy shortages, which the debt hawk government will deal with by causing a recession.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity. There is widespread belief the stimuli didn’t work. I am reminded of the man whose house was burning. His neighbor showed up with a garden hose and actually was able to reduce the flames, but only somewhat. The neighbor wanted to call the fire department, who would bring out the big hoses, but the man told him to stop, because “Obviously, water doesn’t put out fires.”

8 thoughts on “–What will cause the next inflation?

  1. Rodger,

    Here are some stats on year over year increases in prices. It would appear that inflation may be coming from many other places besides oil and in fact preceding increases in oil.

    “Commodity Price % Increases” (Year over Year)
    Agricultural Raw Materials 24%
    Industrial Inputs Index 25%
    Metals Price Index 26%
    Coffee 45%
    Barley 32%
    Oranges 35%
    Beef 23%
    Pork 68%
    Salmon 30%
    Sugar 24%
    Wool 20%
    Cotton 40%
    Palm Oil 26%
    Hides 25%
    Rubber 62%
    Iron Ore 103%


  2. To which year are you referring? Are you merely demonstrating that prices in various commodities have risen? No question about that.

    The question is, what seems to cause all the other prices to rise and fall. Debt hawks say federal deficit spending. I say energy prices, and the evidence is at INFLATION

    Rodger Malcolm Mitchell


    1. This is in the past year. When does a price rise in various commodities become inflation versus simply a “price rise”?


  3. Any general price increase is inflation. The Fed usually wants inflation in the 2%-3% CPI range. During inflation most service and commodity prices will go up, while a few even will go down.

    To answer the question, “What causes inflation,” I looked for long-term correlations between overall CPI and individual segments of CPI and/or money supply. I found that since 1971, the end of the gold standard, energy prices move in sync with inflation, but rise and fall beyond the rises and falls of inflation, indicating they may be the cause.

    Rodger Malcolm Mitchell


  4. People sometimes say, “the dollar is backed by oil”. They mean that as long as oil producers are willing to accept dollars for oil, the dollars will have real value to all kinds of people, since oil is valuable all over. Also, since oil is needed to ship almost everything, it is easy to understand how increasing oil prices would cause other prices to go up. So inflation and oil correlation is very plausible.

    The problem with this theory though is it begs the question, “what causes the market price of oil to go up?”. Also, before 1914, on a real gold standard, there was no substantial inflation. So by this theory is WWI increasing use of motor vehicles and oil why inflation started?

    They are creating a trillion new fiat US dollars each year now. In the 1930s they only created about a billion new dollars each year. Most people can see that if you increase the supply of something too much the value goes down. You don’t think this increase in the number of dollars is the real reason oil prices have gone up?


  5. Inflation is the loss in value of money when compared with the value of goods and services. So inflation can be the loss in value of money or the increase in value of goods and services.

    When oil increases in value, preventing inflation requires that money also be increased in value. This is accomplished by increasing the reward for owning money, i.e. interest.

    The Fed can prevent/cure inflation by increasing interest rates.

    Rodger Malcolm Mitchell


  6. The dollar is not backed by oil. It is backed by the full faith and credit of the U.S. Demand for dollars is backed by the requirement that all domestic taxes must be paid in dollars.

    The market price of oil is determined by supply and demand. The world is using more oil, which causes prices to rise, which affects inflation. There has been no post-gold standard relationship between deficit spending and inflation. Look around you. With the most massive spending in our history, what is the Fed’s main concern? Deflation.

    Rodger Malcolm Mitchell


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