King confident of Inflation Fall to 2%

[biffvernon]

Is it actually possible to have inflation at 2-3% in the same year that oil, gas, iron ore, etc prices pretty much double.

Course it is. The rate of inflation should always exclude food and fuel, otherwise you'd be in trouble, wouldn't you?

Oh, I see. Sorry. How silly of me

[Moadib]

Oh yes it can. Its called depreciation. Iron rusts, wood rots. All food becomes inedible and valueless in time. Your house will fall apart if you don't maintain it. Just maintaining a constant volume of 'hard assets' requires a constant energy input. Then there's consumption... stuff gets used up, degraded. Even gold gets used, dispersed and lost.

To be clear, my statement was "the VOLUME of hard assets doesn't decrease" (it could, but it hasn't so far). Individual assets may decrease, individual units gets used, but the total volume of assets is always increasing - we make more of everything, every year.

Trouble is that paper money is created even more quickly. That is inflation.

Inflation can also be a constant supply of money chasing a diminishing supply of assets due to a declining availability of energy to maintain the volume of those assets.

I agree, in theory it could be that - but today it's not following that model. It is an amount of money and credit increasing at 10-20% per year, depending upon country, and a volume of assets increasing at a much slower pace.

Even then, fiat currency is a somewhat dodgy mechanism, and open to all sorts of dangerous manipulations. Viz the current credit crunch, bought on by the absorption of the financial services sector by white collar criminals. Prudent money management abandoned via 'deregulation' in order to maximize the generation of commission from unintelligibly complex financial derivatives and 'liar loans'. A nice game so long as the music never stopped.

Definitely agree there - making money from money was always a ridiculous proposition. As for the credit crash, couldn't happen to a nicer bunch of parasites. Just a shame for all the people unknowingly caught in the squeeze.

[skeptik]

To be clear, my statement was "the VOLUME of hard assets doesn't decrease" (it could, but it hasn't so far). <snip> we make more of everything, every year.

That game, 'more of everything', (putting aside efficiency gains which along with 'energy quality' I'm ignoring for simplicity of argument) grinds to a halt once net available energy (gross energy flow minus the energy used to produce that energy) ceases to increase each year. That's what Peak Oil/Peak Energy is all about, economically speaking. Perpetual recession, or a series of recessions and minor recoveries, each recession slightly worse than the previous one. A sawtooth economic descent on the Hubbert downslope.

Once over the peak flow rate hump of liquid hydrocarbon production the Catch 22 is lack of capital to invest in alternatives. Virtuous expansionary economics turns to vicious contraction, as currently seems to be happening in the US and UK economies. The positive feedbacks in the downward spiral are very unpleasant.

It may also grind to a halt with a constant energy flow and diminishing available resource grades. It now takes a hell of a lot more energy to get copper at 300ppm out of rocks than it did the Romans to pick nice shiny lumps of native copper out of a seam.

[Moadib]

That game, 'more of everything', (putting aside efficiency gains which along with 'energy quality' I'm ignoring for simplicity of argument) grinds to a halt once net available energy (gross energy flow minus the energy used to produce that energy) ceases to increase each year.

Naturally, but as that point is not yet reached, there continues to be more of everything. Which, back to the original point, means that despite an ever increasing store of "assets" the fiat-tokens/credit increase even more quickly, which puts inflation as money-originated, rather than price originated. Price rises are the effect - money supply is the cause.