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Thread: How do Keynesians explain long term price inflation?

  1. #1

    How do Keynesians explain long term price inflation?

    I've been checking out news stories over the last few days about the rising price of oil. Lots of reasons given, primarily Syria, not one mention of QE as a cause. Now I'll admit that Syria has caused oil to rise from 105 to 110, but how did it get to 105? Why didn't it rise from 3 to 3.50? Oil was about $3 a barrel back in 1970 before we went off the gold standard. Why are most prices (not just oil) 20,30,40 times higher than in 1970? Do you Keynesians agree that by far the primary reason prices are so much higher now than 40 years ago is due to money printing?

    Now I'm going to assume that even die hard Keynesians will agree that the main reason for this price inflation over 40 years is due to money printing. So if that's the primary reason oil went from 3$ a barrel to $110 a barrel, why wouldn't it be the main reason for it going from 3$ to $10 or $10 to $20 or $20 to $50?

    My point is that it's much easier to dismiss the effect of QE on short term price inflation than long term price inflation.



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  3. #2
    Don't they generally say "But wages rise at the same time so it doesn't matter"?
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  4. #3
    Supply and demand determine most prices. How much money seeking how many goods and services. Oil jumped over concerns of a growing war in Syria reducing supplies in the future. QE COULD lead to price inflation but we aren't seeing it yet.

  5. #4
    Quote Originally Posted by Zippyjuan View Post
    Supply and demand determine most prices. How much money seeking how many goods and services. Oil jumped over concerns of a growing war in Syria reducing supplies in the future. QE COULD lead to price inflation but we aren't seeing it yet.
    But you didn't answer my question. What explains the huge price increases over the last 40 years?

  6. #5
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  7. #6
    Doesn't the fed target 2% inflation a years? I thought keynesians rejoice when prices inflate.
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  8. #7
    The goldbugs did it.
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  9. #8
    Quote Originally Posted by fisharmor View Post
    Don't they generally say "But wages rise at the same time so it doesn't matter"?
    It's only natural that wages rise, because wages are prices too. Problem is they don't rise at the same rate. Wages lag behind other prices creating a loss of prosperity.
    Quote Originally Posted by BuddyRey View Post
    Do you think it's a coincidence that the most cherished standard of the Ron Paul campaign was a sign highlighting the word "love" inside the word "revolution"? A revolution not based on love is a revolution doomed to failure. So, at the risk of sounding corny, I just wanted to let you know that, wherever you stand on any of these hot-button issues, and even if we might have exchanged bitter words or harsh sentiments in the past, I love each and every one of you - no exceptions!

    "When goods do not cross borders, soldiers will." Frederic Bastiat

    Peace.



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  11. #9
    This is certainly the case in our central banker/politico class "skim off the top" economy.

    Paying interest on the base money supply we use to transact has that effect.

    Quote Originally Posted by Henry Rogue View Post
    It's only natural that wages rise, because wages are prices too. Problem is they don't rise at the same rate. Wages lag behind other prices creating a loss of prosperity.
    "Like an army falling, one by one by one" - Linkin Park

  12. #10
    Prices in dollars were steady for 40 years before 1970 and then rose like 3,000% (is my math right?) for the 40 years after. But in terms of real money like gold, prices remained relatively flat for the entire 80 year period.

    How can anyone deny that monetary inflation was the primary cause?

  13. #11
    Quote Originally Posted by Henry Rogue View Post
    It's only natural that wages rise, because wages are prices too. Problem is they don't rise at the same rate. Wages lag behind other prices creating a loss of prosperity.
    Plus it screws things up in general. It's harder for a business to make long term plans when the currency is losing value. And the really big problem is if prices start to rise dramatically. And that is coming.
    Last edited by Madison320; 08-28-2013 at 03:11 PM.

  14. #12
    Quote Originally Posted by Madison320 View Post
    Plus it screws things up in general. It's harder for a business to make long term plans when the currency is losing value.
    Maybe for smaller businesses, but don't most business 'expect' like around ~4-6% inflation/year during their budgeting processes?

    I worked at a fairly large corporate company for a few years, and every year each department basically expected a 4% increase in their baseline budget every year. Most of the people there expected between a 2-10% raise every year, etc. The monetary inflation was basically baked in.

  15. #13
    Quote Originally Posted by Zippyjuan View Post
    Supply and demand determine most prices. How much money seeking how many goods and services. Oil jumped over concerns of a growing war in Syria reducing supplies in the future. QE COULD lead to price inflation but we aren't seeing it yet.
    Yeah, supply and demand. Like how 'the Bernanke' supplies an endless amount of greenbacks and demands services and goods in return?

  16. #14
    Quote Originally Posted by Madison320 View Post
    But you didn't answer my question. What explains the huge price increases over the last 40 years?
    I don't think anyone can give you an exact answer. Many factors influence prices. I'd wager the biggest factor is the drastic increase in demand over the past 40 years, plus speculation over the exponential increase in the future as more 2nd world countries fully modernize.

    Then on the supply side people have been worrying about peak oil for a long time, and we might already be there. Production may fall off as demand continues to increase.
    Last edited by brandon; 08-28-2013 at 03:25 PM.

  17. #15
    Quote Originally Posted by brandon View Post
    I don't think anyone can give you an exact answer. Many factors influence prices. I'd wager the biggest factor is the drastic increase in demand over the past 40 years, plus speculation over the exponential increase in the future as more 2nd world countries fully modernize.

    Then on the supply side people have been worrying about peak oil for a long time, and we might already be there. Production may fall off as demand continues to increase.
    Oil was just one example, Why have all prices risen IN GENERAL over the last 40 years in dollars? Why have prices remained flat priced in gold? Why did it all happen right when we went off the gold standard?

  18. #16
    Quote Originally Posted by VBRonPaulFan View Post
    Maybe for smaller businesses, but don't most business 'expect' like around ~4-6% inflation/year during their budgeting processes?

    I worked at a fairly large corporate company for a few years, and every year each department basically expected a 4% increase in their baseline budget every year. Most of the people there expected between a 2-10% raise every year, etc. The monetary inflation was basically baked in.
    Yeah, I guess if it's consistent you can plan for it. But what if it's not?



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  20. #17
    Quote Originally Posted by VBRonPaulFan View Post
    Yeah, supply and demand. Like how 'the Bernanke' supplies an endless amount of greenbacks and demands services and goods in return?
    Exactly. 2 things determine the price. Supply and demand of the product and supply and demand of the currency (is that 4 things?).

  21. #18
    Bad example, really.

    It takes money to bring oil to the ground. The costs are very high. Look at oil producing stocks; they've gone pretty much nowhere despite a rising stock market and rising oil prices.

    Why is oil 30-40x more expensive today? Because all the easy to access oil (oil that doesn't take substantial drilling, manpower, investment) has already come to the ground. Now we're digging deeper, digging in weird places (offshore, anyone?) and frankly, all the cheap stuff is gone. You'll never see $50 oil again, or at least not for very long, because the cost to bring it to the ground is much, much higher than that.

    Obviously inflation leads to price increases over time, but choosing oil as a single example of price increases is silly. Hence why the Fed uses a basket of stuff, rather than just one good.

    Sanford C. Bernstein estimates that the marginal cost of oil production has increased about 250 per cent over the last decade, rising from just under $30 a barrel in 2002 to a record of $104.5 a barrel last year. At the same time, cash costs have risen from $9.70 a barrel in 2002 to $44.20 a barrel last year.
    http://www.ft.com/cms/s/0/ec3bb622-c...#ixzz2dJ8u0ZPp
    Last edited by Jordan; 08-28-2013 at 05:03 PM.

  22. #19
    Quote Originally Posted by Madison320 View Post
    Why have prices remained flat priced in gold?
    They haven't.

  23. #20
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  24. #21
    Quote Originally Posted by Madison320 View Post
    Oil was just one example, Why have all prices risen IN GENERAL over the last 40 years in dollars? Why have prices remained flat priced in gold? Why did it all happen right when we went off the gold standard?
    If prices in terms of gold have been flat since 1972 (when we ended the gold standard), then an inflation adjusted price of gold chart should be a flat line. Is it?

    http://inflationdata.com/Inflation/i...tion_chart.htm

  25. #22
    Quote Originally Posted by Jordan View Post
    Bad example, really.

    It takes money to bring oil to the ground. The costs are very high. Look at oil producing stocks; they've gone pretty much nowhere despite a rising stock market and rising oil prices.

    Why is oil 30-40x more expensive today? Because all the easy to access oil (oil that doesn't take substantial drilling, manpower, investment) has already come to the ground. Now we're digging deeper, digging in weird places (offshore, anyone?) and frankly, all the cheap stuff is gone. You'll never see $50 oil again, or at least not for very long, because the cost to bring it to the ground is much, much higher than that.

    Obviously inflation leads to price increases over time, but choosing oil as a single example of price increases is silly. Hence why the Fed uses a basket of stuff, rather than just one good.



    http://www.ft.com/cms/s/0/ec3bb622-c...#ixzz2dJ8u0ZPp
    The "newest" sources for oil- deep water drilling and oil shale fracking are not profitable at $50 a barrel of oil so those supplies would not come online. The oil shale regions have experienced boom and bust about every 20 years or so as the price of oil moved up and down. The "cheap and easy" sources are already found and being used up so that leaves the more expensive oil to be found and exploited which will naturally raise the price of oil over time. No matter what the currency or money you use. As scarcity or demand increases, prices will rise on things- even if the money supply does not change.
    Last edited by Zippyjuan; 08-28-2013 at 07:13 PM.

  26. #23
    Zippy, I know you try, but sometimes.... the government line just doesn't work.
    rewritten history with armies of their crooks - invented memories, did burn all the books... Mark Knopfler

  27. #24
    Prices are determined by many factors. One is the cost of inputs- what it costs to produce the item. If those go up, the producer wants to raise prices to recover those costs. How much of those costs they can pass along to consumers depends on the market for those goods. The more sensitive the market is to price changes, the harder it is to pass along costs- that is, how much sales of the good changes if prices are raised or lowered (elasticity). Oil for example has a fairly inelastic demand- price changes don't have a dramatic change in demand for oil (large changes in their prices over time can change demand). With elastic demand, small changes in prices can lead to big changes in demand (sales) so sellers are less willing to raise prices unless they have to.

    Then the relative competitiveness of the sellers market will have an impact on how much a price can increase as well. With fewer suppliers, they can collude to keep prices at a certain level (like the oil industry with OPEC determining most of the price even for non- OPEC producers). This makes changing prices easier. On the other hand, if producers are highly competitive (like say farmers), a producer is not very willing to raise prices out of fear of losing business to other farmers. The more competitive the industry, the harder it is to raise prices.



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  29. #25
    Quote Originally Posted by Zippyjuan View Post
    If prices in terms of gold have been flat since 1972 (when we ended the gold standard), then an inflation adjusted price of gold chart should be a flat line. Is it?

    Zippy, Jordan and Brandon:

    "Prices in terms of gold" or "prices in terms of dollars" has absolutely nothing to due with with government inflation statistics. It means how much gold or dollars it takes to buy something.

    In 1970 it took $3 to buy a barrel of oil and it took .0857 ounces of gold.
    In 2013 it takes $105 to buy a barrel of oil and it takes .075 ounces of gold.

    It takes 35 times the amount of dollars to buy oil now compared to 1970.

    It takes virtually the same amount of gold to buy oil now compared to 1970.

    You'll get roughly the same answer comparing the price of most commodities. The reason is simple. The supply of money has gone way up. When you increase the supply of something the price goes down. The price of a dollar has gone down. The fed has increased the monetary base from somewhere around 40 billion in 1970 to over 3 trillion now. That's something like 75 times as much money. That's 99% of the reason prices have gone up. In fact I think prices will be MUCH higher when prices catch up to all this recent money printing.
    Last edited by Madison320; 08-29-2013 at 03:15 PM.

  30. #26
    Okay, cool. When will all this inflation catch up? I've been here since 2007 listening to the exact same stuff. Six years later...and I'm still waiting for massive inflation.

  31. #27
    Quote Originally Posted by Madison320 View Post
    Zippy, Jordan and Brandon:

    "Prices in terms of gold" or "prices in terms of dollars" has absolutely nothing to due with with government inflation statistics. It means how much gold or dollars it takes to buy something.

    In 1970 it took $3 to buy a barrel of oil and it took .0857 ounces of gold.
    In 2013 it takes $105 to buy a barrel of oil and it takes .075 ounces of gold.

    It takes 35 times the amount of dollars to buy oil now compared to 1970.

    It takes virtually the same amount of gold to buy oil now compared to 1970.

    You'll get roughly the same answer comparing the price of most commodities. The reason is simple. The supply of money has gone way up. When you increase the supply of something the price goes down. The price of a dollar has gone down. The fed has increased the monetary base from somewhere around 40 billion in 1970 to over 3 trillion now. That's something like 75 times as much money. That's 99% of the reason prices have gone up. In fact I think prices will be MUCH higher when prices catch up to all this recent money printing.
    Oil in terms of gold has not been steady but has actually been all over the place. (gold prices were fixed in terms of the dollar by the gold standard before 1972 so we really can't compare prices before then though this chart does go back to 1950)- that today matches 1970 is just a coincidence- as recently as 2008 it was more than double in terms of gold:

    http://pricedingold.com/charts/Crude-1950.png
    Last edited by Zippyjuan; 08-29-2013 at 05:08 PM.

  32. #28
    Quote Originally Posted by fisharmor View Post
    Don't they generally say "But wages rise at the same time so it doesn't matter"?
    So in the year 2500 gas will be $27,000 dollars a gallon and a loaf of bread will be $13,000. That's okay though because the average salary will be
    $303,750,000 by then! Nothing unusual or piquing of interest about that...

    This was one thing I always contemplated when I was a kid and new zero about anything in regards to inflation. Also, 2% inflation a year will have a compounding effect that will, for a fact, lead to an inevitable end. No such thing as perpetual exponential growth.

  33. #29
    You are right op. The main fundamental driver of oil price increases has been fed induced inflation. Anyone who denies this is playing pure theater with you. Using government cpi numbers, prices have multiplied by a factor of 6. This accounts for half of the price increase as 3*6*6 = 108. Without the Fed, my guess is that oil would be near 12-15 bucks if not lower. The problem with "rising wages" is that they do not go up evenly for everyone and almost always lag behind when holding productivity constant.

  34. #30
    Quote Originally Posted by Zippyjuan View Post
    Oil in terms of gold has not been steady but has actually been all over the place. (gold prices were fixed in terms of the dollar by the gold standard before 1972 so we really can't compare prices before then though this chart does go back to 1950)- that today matches 1970 is just a coincidence- as recently as 2008 it was more than double in terms of gold:

    http://pricedingold.com/charts/Crude-1950.png
    I said RELATIVELY flat. Take that chart and overlay the price of oil in terms of dollars. You'll see that the price in terms of gold is a flat line. In addition the price in terms of gold does not trend in any one direction, it merely fluctuates slightly. In terms of dollars it takes off like a rocket. But more importantly you're missing the entire point and not answering my question. Maybe I shouldn't have mentioned gold and oil. That may have caused you to get too emotional. Let me try again without the G word or O word.

    Why is there dramatic, long term price inflation over the last 40 years? I agree with you that many factors influence prices as you stated earlier. But that doesn't explain how ALL prices have risen. Do you think it's just an amazing coincidence? That just happens to coincide with an expansion of the monetary base?

    Quote Originally Posted by Zippyjuan View Post
    .(gold prices were fixed in terms of the dollar by the gold standard before 1972 so we really can't compare prices before then though this chart does go back to 1950)
    THAT'S the POINT!!! Think real hard ... It'll come to you. Hint: There was very little expansion of the monetary base while we were on a gold standard.

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