Wednesday, March 09, 2011

Fuel prices, and how the politicians can fix them [update 2]

2999I've got to make a couple of small points about petrol.  About increased global demand, a sinking US dollar, and the unrest in the Middle East between them causing rising petrol prices here, and about alleged economists here claiming rising petrol prices will cause "inflation."

First, there’s nothing we can do here about rising global demand the sinking US dollar or the unrest in the Middle East. But there is something that can be done here about rising petrol prices, and by those very politicians crying crocodile tears about them. Those thieving bastards could bring them down in a stroke. In a moment. In a heartbeat. Because in one simple move taking less than an hour they could take off/reduce/put a cap on all those ACC Levies, Excise Taxes, Emissions Tax Scam taxes and GST on petrol that rake in billions of dollars every year for the government—extortions that between them make up more than half the price you pay for petrol at the pump.

Think about that next time you hear politicians saying meekly “there’s nothing we can do.”

Arseholes.

Second, I’ve got something to say about all those alleged economists who claim rising petrol prices will cause "inflation." Alleged economists like (to pick on one at random) Bank of New Zealand economist Doug Steel, who says “the increase in petrol prices, if it stayed at the current level, would directly add 0.5 per cent to [price] inflation in the first quarter of 2011.” I’ve got one word for Nick and his like-thinking colleagues, and it’s this: Bullshit.

3018 Price inflation, if you’ll recall, is a situation in which we experience generally rising prices, virtually across the board, on everything in the basket. And the argument usually made by Doug and his other unthinking baskets is that because fuel prices feed into virtually every other price in the book, so rising fuel prices will be responsible for rising prices across the whole basket.

This argument holds a certain amount of water.

If you don’t think about it too much. 

Or at all. 

Because as everybody knows who runs any kind of budget, if the price of X goes up so you spend more on X then that means you have less to spend on Y and Z and everything else in your basket—and when that happens across a whole economy the prices of Y and Z will tend to go down

The ups and downs balance out. They have to, because there’s only so much money in the whole economyAnd if more of that money is being spent on one thing (because its price is going up and its needed) then there’s less money to be spent elsewhere on things that aren’t needed so much, and so the prices for these things must diminish commensurately.

So the idea that rising petrol prices cause generally rising prices is a bust. It has to be—as long as the amount of money in the system stays the same.

Frank Shostak explains the process better than I could:

_Quote If the price of oil goes up, and if people continue to use the same amount of oil as before, people will be forced to allocate more money to oil. If people's money stock remains unchanged, less money is available for other goods and services, all other things being equal. This of course implies that the average price of other goods and services must come down. Remember: a price is the sum of money paid for a unit of a good. (The term "average" is used here in conceptual form. We are well aware that such an average cannot be computed.) Note that the overall money spent on goods doesn't change; only the composition of spending has altered, with more on oil and less on other goods. Hence the average price of goods or money per unit of good remains unchanged.

It's so obvious, even a central banker should be able to see it. A rise in the price of one, or several commodities, will certainly have an effect on how people spend their money, and what they spend it on, but it can have no effect at all on overall prices across the board. It can't.

There are many ways that the prices of one commodity can rise. But there’s only one way that generally rising prices can occur—one thing that can have an effect on the general price level, something that (unlike petrol) actually does touches every single thing that is supplied, demanded and for which a price is charged—something that touches every thing in every market.

I speak, if you haven’t guessed, about money, and the rate of increase of the money supply.

Because (as everybody on a budget would already know) only if you make more money is it possible for you to keep buying the same amount of Y and Z while the price of X goes up.  Explains Shostak,

_Quote...the rate of increase in the prices of goods and services in general is going to be constrained by the rate of growth of money supply, all other things being equal, and not by the rate of growth of the price of oil. It is not possible for increases in the price of oil to set in motion a general increase in the prices of goods and services without corresponding support from the money supply... The key then for general increases in prices, which is labeled by popular thinking as inflation, is increases in the money supply, e.g., the supply of US dollars.

As Milton Friedman used to say, “Inflation is always and everywhere a monetary phenomenon.” 

To put it another way, it is the monetary inflation of the central bankers that is always and everywhere responsible for price inflation, not the rising price of petrol.

And far from being impotent to act, this is something Mr Bollard and his colleagues can very much do something about. After all, it's they who are responsible. The culpability for monetary inflation lies wholly with them—and with the flawed economic thinking that put them in positions of monetary power.

UPDATE 1:  As energy costs surge and food prices touch record highs the world’s leading central bankers have emerged form a meeting vowing to fight inflation – by which is meant they vow to print money so slowly that few will notice.  All except one. Every major central bank besides the US Federal Reserve is beginning to raise interest rates to “fight inflation” (and encourage savings), but “The Fed” continues to lower interest rates and print money like there's no tomorrow.

The Fed is the only major central bank that can export its inflation, because it is still the global reserve currency. It is still the currency in which oil prices are denominated. For the moment.

Because once everyone realises The Fed is just exporting its monetary inflation, how long before America gets flooded with unwanted Fed notes from around the globe?

[Hat tip IbLvMcgmftJMK]

UPDATE 2: Alvaro Vargas Llosa reckons rising world price inflation means that bond holders will be pushing up world interest rates anyway, whatever the world’s central bankers decide to try to do with them.

_QuoteReaders might remember that from time to time, I fret about the danger of price inflation due to the frenetic printing of money going on in the world. As a survivor of hyperinflation (Peru, 1980s), I suppose you can’t blame me. In any case, symptoms of price inflation have begun to pop up in many countries.
   
The consumer price index in Britain has officially reached 3.7 percent but many observers think the real figure is above 4 percent, double what the government had forecast. In Europe in general, the annual inflation figure has surpassed what the European Central Bank had targeted. Not to speak of China, where it is almost 5 percent and rising.
   
Bill Gross, who manages the world’s largest bond fund for investment advisers Pimco and whose job is essentially to find debt securities whose yields beat inflation, put it succinctly: “Why would you want to be a bondholder with bond yields so low and that sort of inflationary trend?” Bond investors are simply waiting for a big rise in inflation followed by significant interest rate hikes.

Read on here. [Hat tip NZBR]

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7 Comments:

Anonymous Anonymous said...

isn't the real problem that these prices don't realte to actual supply and demand but to trading of futures? haven't created an artificial market?

3/09/2011 10:42:00 am  
Blogger Mike.Gayner said...

How quaint that there are still proponents of the thoroughly discredited Austrian school of economics. I see the appeal though - even childlike minds like the author's can understand it. No matter that it's completely false.

3/09/2011 11:43:00 am  
Blogger PC said...

@Mike. That's a very thorough demolition job, Mike. Thanks for your cogent, well-reasoned arguments.

3/09/2011 11:52:00 am  
Anonymous Richard McGrath said...

@Mike

I must have missed the very thorough discrediting of the Austrian school. Can you please point me toward an online link to the work that disproves the claims of Mises et al?

3/09/2011 12:21:00 pm  
Blogger Mike.Gayner said...

How adorable.

3/09/2011 01:04:00 pm  
Blogger PC said...

Your analysis just gets better and more profound, Mike.

Now maybe you could try making an actual point?

3/09/2011 03:13:00 pm  
Anonymous Anonymous said...

minor factual error - taxes make up a little less than half the pump price not more - 'only' about 40%.

http://www.med.govt.nz/upload/65514/weekly-table.xls

insider

3/11/2011 11:37:00 am  

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