Is deflation on the way?

[pscot]

This is limited and anecdotal but it's still pretty i8nteresting.

http://www.minyanville.com/businessmarkets/articles/deflation-pizza-hut-price-research-in/8/19/2010/id/29684

....Then yesterday, Minyanville’s Michael Comeau pointed readers to the price cut of Madden NFL 2010, which is made by Electronic Arts (ERTS). (See "Madden" Price Cuts Bad Omen for Electronic Arts). Amazon was at the center of this price cut as well. Offering the brand new Madden video game for $49.99, $10 off the $59.99 industry standard for new video games. Comeau also points out that GameStop (GME) cut the price of Madden as well.

Today Pizza Hut, a Yum Brands (YUM) company, is planning to announce price cuts on most of its menu's main items. According to the New York Times, medium pizzas will cost $8, large pizzas will cost $10, and specialty pizzas will cost $12. I remember when a large, two-topping pizza cost $19.99.

The obvious reason for the price cuts are changes in consumer behavior. Consumers aren’t spending like they used to because they're worried about a sluggish economy; so companies slash prices to entice consumers.

Unfortunately for inflationists (hand raised), this screams deflation. Deflation arises when heavily indebted individuals (or corporations/governments) are forced to reduce spending because their earnings and incomes are deflating. This leads to a default on debt.

[Sherman A1]

1. I don't think so, but

if it would happen, prices might just readjust themselves to where they where before the big jumps they took in 2007 with the "reason" being the ripple of increased fuel prices. Taking into consideration the stagnation of wages over these last 30 years perhaps a bit of deflation just ain't such a bad thing.

[Warpy]

2. That's why the big institutions are loath to lend

and the big corporations are loath to borrow right now, they're all betting on deflation. Extending or taking on debt in an inflationary period is sound business sense since the debt will get cheaper to pay off as the currency inflates. Likewise, in a deflationary cycle, people are stuck with high priced debt they can't pay or expect to be repaid as the currency deflates and there is less money overall to spend.

Unfortunately, that's what a liquidity trap often accomplishes--institutions are so fearful they end up causing the very thing they fear.

Inflation hurts old folks on fixed incomes. Deflation hurts us all.

[Name removed]

3. Deleted message

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[Warpy]

5. Unfortunately, that's not always true

since a deflationary period is always marked by high unemployment, meaning savers have to burn through their savings before prices have dropped appreciably. That's where we are right now, with a lot of people, especially workers over 50, being unemployed for YEARS at this point with no prospect of a job doing anything, anywhere.

[Art_from_Ark]

8. Depends on what is being inflated, and what is being deflated

If prices are inflating but wages aren't, the one who stocks up on necessities now might have an advantage since prices will be higher later.

[northernlights]

9. deflation punishes the thrifty who paid their mortgages off

and when the supermarket shelves are empty, it punishes *everybody.*

My father never spoke about the depression. My mother spoke about it once, and I've never forgotten what she told me.

"At first it was great because everything was so much cheaper. And then it wasn't great, because there wasn't anything to buy."

I will be rototilling a chunk of pasture within the next couple weeks to significantly increase my gardening capacity. I'm keeping a close watch out now...when deflation hits big time, will stock up on as much as possible. Toilet paper, seed, canned/boxed food, etc.

Last year we had a terrible, terrible hay year, with a single very late cut and many hayfields uncut because they were under water, so I was shocked to learn that a local grower had 100 round bales left over. So this year's is cheaper than last and I'm getting some year old at half this year's price. In the meanatime, this year is a boom...we've already had 2 cuttings in plenty of time for a 3rd. I can't help but wonder what his prices will be next year. And at what point he'll stop making any money at all on hay and be put out of business...

[Statistical]

21. Deflation doesn't punish those who paid their debts.

That is one area where paying off debts puts you ahead.

In deflation your mortgage payment remains fixed. Eventually wages will follow prices of goods (down) thus you have less and less money to meet your fixed obligation.

In inflation your mortgage payment also remains fixed. Eventually wages will follow prices of goods (up) thus you have more and mroe money to meet your fixed obligation.

I feel rather financially secure but crippling deflation and poor labor market is the one thing that *could* sink me.

[Po_d Mainiac]

4. We're on the verge of a deflationary/inflationary spiral

It only sounds like a contradiction till you look at our other deficit. That being the trade imbalance.

Since the first week in June, the U$D has fallen against the EUR, JPY, and the CAD. We carry a trade deficit with all 3. It would/will be a lot worse if/when oil climbs. That is the inflationary part of the pie. We are also competing with Asia for many of the same necessities of life, as their buying power grows.

Deflation is crushing RE and discretionary spending. The stuff we don't really need or are priced out of range. This is the part where the bullshit behind the so-called "jobless" recovery really starts to take on a smell all its own.

As inflation on the stuff we need to survive rises (again, we are not the only consumers in the world for food and fuel) the downward pressure increases on retailers and manufacturers of the stuff we can live without. People are starting to realize that there are a lot of products that we thought we needed a couple years ago, but are not basic needs for everyday living.

Paring down personal debt is also going to take a major toll on items considered discretionary, and or luxuries. This is where things are going to get really ugly as the recession/depression deepens. With an economy based 70% on consumer spending, we can expect further job losses at the pizza houses/restaurants and electronic stores.

Other non-positive economic pressures that will factor in: The drought in the Russian 'bread basket' Whether BP has stopped the leak, or fucked up the sea floor so bad it will blow again. What the hurricane season sends our way.
YMMV

[HCE SuiGeneris]

7. Agree wholeheartedly.

:kick:

[northernlights]

10. oil is still inflated in part due to speculation

stock market price is still mid-70s/barrel. The last time we had $1.50/gallon was when the commodity speculators ran and it dropped to its "real" price of <$50/barrel.

But yes, a collapsing dollar is another piece of the equation.

[happyslug]

18. I question that, Oil has been about $70 a gallon for over two years

And That would imply it is NOT the product of speculation (Speculation always proceed a steep drop or increase in the price on the produce people are speculation on). The price of oil has held to long for speculators to be at work.

Government/oil companies do have the power to keep the price steady, but by withholding or increasing production. Production has NOT increased that much in since 2008, so again does NOT seem to be the cause of the steady hold on price.

The Best explanation seems to be the cost to produce the "Marginal production cost" of a barrel of Oil as opposed to any barrel of oil. "Marginal production Cost" is the cost to produce an item needed to meet demand. If demand drops below that cost, the producer stops making the item (in this case oil). The problem is when demand can NOT drop, then the price is set by the cost of that marginal producer, NOT the cost of the lowest producer.

Right now, Saudi Arabia has some of the lowest costs to produce oil. From the 1970s till about 2002, Saudi Arabia restricted the price of oil by setting how much oil it would sell. The rest of OPEC was to do the same, but has never done so, producing at maximum production . Thus the price has been set by Saudi Arabia for decades by the House of Saud determining how much oil it will sell.

Sometime after 2001 (and maybe before, the records are state secrets in Arabia) the House of Saud lost that production capability (Demand exceeded even what Arabia could produce). For that reason demand exceeded supply and started to go up. Speculators got on this boat early, but more in anticipation of future price increase then any effort by them to manipulate the market. Thus you saw a more rapid increase in the price of oil then actual oil demand and supply called for, for the price as guided by what it could be sold for in the three or more months it took to get from Arabia to the USA.

In 2008 the Speculators anticipated even higher prices based on the production numbers and push the price so high Americans for the first time in history, used less oil in 2008 then they had used in the previous year. In 2008 the difference was marginal, something like 99.9% of 2007. 2009 was worse an almost 5% drop in oil consumption.

Now the speculators took the price to it heights in August 2008, then the price increased stalled. Then the price started to drop and the Speculators re-entered the market betting on further down drops. Thus by Election time the price of oil had dropped drastically. Notice speculators not only drove the price up, speculators also drop the price down. Speculators always do that and is part of a healthy economy.

The problem was, the Speculators did drive the price so low, some oil producers could no longer make money and stop selling oil (Or worse, speculators refused to buy it at their cost, wanting it at a lower price). The price recovered at that point to about $70 a Barrel. It goes down near $60 and then a shortage of oil appears (i.e. US Oil stocks get low) and the price of oil goes up. The Price goes over $80 and you see a huge selling of oil, and the price drops. This up and down production had been the rule for over 2 years.

My Guess, is the #3 oil producer in the world has fields that are marginally profitable at $70 a Barrel, when the price of oil drops below that price it stops producing from those wells for they are no longer profitable. Since most of these marginal wells are "Seepers" i.e. produce less then a barrel a month, the owners just leave those wells seep till the price gets over $80 and then pump those wells. This increased production for a while and the price drops, but then the owner of those seepers leave them set again. Thus the up and down range of the price of oil. The key is the cost of production of those seepers and that appears to be about $70 a barrel.

For your information the #1, #2, and #3 oil producers have been the same since at least the 1960s (and maybe the 1950s). Saudi Arabia is in that group, but only since the 1950s, as the #1 producer production dropped. The #1 and #2 producer of oil producers would remain #1 and #2 throughout the 1960s, 1970s and 1980s. In the 1990s Saudi Arabia bypassed both of them to become #1. Something is happening in Saudi Arabian production for the Former Soviet Union (Russia and the former Soviet Central Asiatic Republics) became #1, with the country that had been the #1 producer for decades falling to #3.

These three oil producers still produce 23 Million Barrels of oil a year out of a world wide production of 85 Million. If you include #4, China, #5 Iran, #6 Canada, #8 Mexico, #8 Iraq, #9 Norway, #10 United Arab Emirates and #11 Kuwait, you have over 45 Million Barrels being produced, over half of total world production in the top 11 oil producers. Yes, the top three producers pump as much oil as the next 8. Worse #4 China is a net oil importer so its 3.7 million barrels of oil is NOT for the world market, this is also true of the #3 producer, which produce almost 5 million barrels of oil. Thus over 8.6 million barrels of oil is NOT available for the world market.

China needs 8 million Barrels a day, with production of only 3.7 China MUST import 4.3 Million Barrels a day. The European union needs 14.3 Million Barrels when it only produces 2.5 Million Barrels (but that excludes Norway, which is NOT a member of the EU and exports 2.3 million barrels a day but use less then .3 million internally). The UK is also NOT a member of the EU but till recently was an oil exporter, but is now a net importer (Uses 1.7 Million Barrels and produces just under 1.6 Million Barrels). Russian is another factor, producing 9.9 Million Barrels but use less then 2.8 million barrels).

Now in these fact you ask yourself where is the USA? The answer it is the #1 user of oil at 19.5 million barrels per day, and is still the #3 oil producer at just under 5 million barrels per day. Most of that is made up from Canadian, Mexican and Venezuelan oil imports (8.0 Million Barrels imported from all three) but leaving the US have to import oil from elsewhere for over 6 million barrels of oil.

As to the Seeper wells I refer to earlier those are in the US, which was the #1 Oil exported from the 1860s till the 1950s. It remained the #1 producer till the early 190s (when the old Soviet Union Passed it) and the US and the USSR fought out for #1 production till the Soviet Union Collapsed in 1989. Then Saudi Arabia took over and both the US and former USSR production declined. Russian production has picked up since 2000, but recent evidence of further drop in production. Mexico has also reported further reduction in production and it is believed so has Saudi Arabia (But that is a state Secret in Arabia). With the UK becoming a net oil importer we are facing a mess.

Oil production:
http://en.wikipedia.org/wiki/List_of_countries_by_oil_production

Oil Consumption:
http://en.wikipedia.org/wiki/List_of_countries_by_oil_consumption

Oil Exports: (Please note these are total exports NOT net exports for example the US imports over 14 million barrels of oil a day, but then exports 1.4 million barrels of oil. mostly to Mexico and Venezuela given that the US has the Refineries to refine the oil.
http://en.wikipedia.org/wiki/List_of_countries_by_oil_exports

My point is simple, speculators are NOT keeping the price in this tight price ban, I suspect it is related to the cost to pump the marginal barrel of oil to equal demand. I suspect it may be as simple as oil from seeping wells (can be kept for months without having to take it to market) or something else but NOT speculators. This price ban has lasted to long.

[femrap]

6. Consumers.....

ie, the Former Middle Class (FMC) don't have any fucking $$$$$$. Plus the companies providing their products are using 'not so good/less than quality' ingredients.

Never mind the fact that we are now '3rd World America.'

[OllieLotte]

11. Yes and no?

Just my opinion, but I see prices rising for most commodities including food and energy. I see housing prices falling and wages being flat. The net might be modest inflation.

[pscot]

12. The price of a bushel of wheat

is 3X what it was a year ago. Oil is harder to get at, and everybody wants it. The math is awful.

[OnlinePoker]

14. This is because of speculators.

Due to the Russian drought, expected wheat production worldwide is expected to drop about 6% (680 mmt down to 645 mmt). Despite this minor drop in the grand scheme of things, speculators have bid the price of wheat up from around $170 per tonne to $270 per tonne, a 59% increase. Given that there are 39.2 bushels of wheat in a tonne and 42 Lbs of white flour can be produced by a bushel, that comes to 1646 lbs of white flour per tonne. Divide that $100 increase by 1646, it comes to only about 6 cents a pound extra, or $1.20 more for a 20 lb bag of flour. Be interesting to see how much extra the flour producers charge by the time you actually have to pay for it.

[pscot]

17. Without "speculators"

there would be no "markets". The alternative is a managed system like the Soviets tried. Billions would starve.

[Yavin4]

13. Deflation Is Here

Labor and housing prices are falling like stones, and the days of easy credit holding up prices are long over.

See the interest rates on long term govt bonds.

[Kringle]

16. demand-pull inflation is dead, it died with the middle class

cost-push inflation is limited
to oil price spikes and crop failures

[Yavin4]

22. Even Oil Won't Impact Inflation

Without demand, there's less consumption. Less consumption means less use of enegy to transport goods. Moreover, less people working also means less cars on the roads in the mornings.

[roamer65]

15. Price cut = smaller pizza and lower quality ingredients.

[GliderGuider]

19. My understanding is that deflation has nothing directly to do with prices.

Essentially, deflation occurs when there is too little money in the system, and the velocity of money declines. Nominal prices go down as a result of deflation, the fall of prices is not in itself deflation. An analogy might be the fall in blood pressure you observe when your heart stops pumping. The fall in blood pressure isn't the problem, it's merely the result of the real problem - your heart stopping.

I subscribe to the following definition from The Automatic Earth:

Although inflation and deflation are commonly thought of as descriptions of rising or falling prices, this is not the case. Inflation and deflation are monetary phenomena. The terms represent either an increase or a decrease, respectively, in the supply of money and credit relative to available goods and services. Rising prices are often a lagging indicator of an increase in the effective money supply, as falling prices are of a decrease. There is an important distinction to be made between nominal prices and real prices, however. Nominal prices can be misleading as they are not adjusted for changes in the money supply and so do not reflect affordability. Real prices, which are so adjusted, are a far more important measure.

[Statistical]

20. True to a point however it is difficult to observe the real money supply and velocity of money.

Thus prices is a sign of deflation/inflation. Much like Doctor who observes your blood pressure dropping to zero along with no pulse can determine you are dead despite not seeing your physical heart stop beating.

[Yavin4]

23. Not So With Dick Cheney

The man has no pulse.