Friday, June 20, 2008
Inflation
Inflation is the result of inflating something. Commonly used to refer to rising prices, inflation only relates to rising prices where what is being inflated is the paper-money supply. The government, ever borrowing to fund its deficits, has a great incentive to print more money, or inflate the money supply. More money chasing the same amount of goods results in higher prices for those goods. I.e. the amount of goods produced by a society requires a certain value of the total money supply, so more money means less value per unit of money. Rising prices caused by increased demand or decreasing supply isn't inflation. That is supply and demand economics in action.
Somehow I got to thinking of the price of gold and oil at about the same time as I was thinking about my first job in a hamburger stand, paying a whopping 90 cents per hour. Minimum wage at the time was $1.60, but the owner of the Burger Chef was too cheap to pay that. So looking up the price of oil in 1968, a steady $3.07 for the entire year for a barrel of West Texas crude, and the price of gold, fixed by the government at $35/ounce, I see that it would have taken me a bit over 40 hours to earn enough, pretax, to buy an ounce of gold and a barrel of oil. At minimum wage, it would take 23.8 hours.
So what does the minimum wage need to be today to be able to purchase a barrel of oil ($134) and an ounce of gold ($901) after 23.8 hours? Almost $43.50 an hour, that's what! That cheap owner of the Burger Chef is probably only paying $26.75 an hour to start.
When the government decoupled the value of the dollar from hard commodities, i.e. gold and silver, and went into the business of inflating the paper money supply, it enabled inflation to eat into the value of those dollars, making it cheaper to pay off its debt. The price of everything must go up as the money supply is inflated. Regardless of any downward fluctuations, real estate has gone up so much over the decades because it is a real commodity. Plus, financing it with debt when there is money-supply inflation is a smart move, so speculation can drive it too high over the short term.
Why is oil $134 a barrel? Aside from inflation of the money supply, it is because global oil supply is unable to keep up with increased global demand. We are already approaching, or at, peak oil, and neither our president nor any of the candidates has an energy policy that addresses the tremendous upheaval of our economy as global demand for oil exceeds supply. (Unless you count occupying Iraq as addressing oil supply.) Oops. Wrong rant.
Inflation is the result of inflating something. Commonly used to refer to rising prices, inflation only relates to rising prices where what is being inflated is the paper-money supply. The government, ever borrowing to fund its deficits, has a great incentive to print more money, or inflate the money supply. More money chasing the same amount of goods results in higher prices for those goods. I.e. the amount of goods produced by a society requires a certain value of the total money supply, so more money means less value per unit of money. Rising prices caused by increased demand or decreasing supply isn't inflation. That is supply and demand economics in action.
Somehow I got to thinking of the price of gold and oil at about the same time as I was thinking about my first job in a hamburger stand, paying a whopping 90 cents per hour. Minimum wage at the time was $1.60, but the owner of the Burger Chef was too cheap to pay that. So looking up the price of oil in 1968, a steady $3.07 for the entire year for a barrel of West Texas crude, and the price of gold, fixed by the government at $35/ounce, I see that it would have taken me a bit over 40 hours to earn enough, pretax, to buy an ounce of gold and a barrel of oil. At minimum wage, it would take 23.8 hours.
So what does the minimum wage need to be today to be able to purchase a barrel of oil ($134) and an ounce of gold ($901) after 23.8 hours? Almost $43.50 an hour, that's what! That cheap owner of the Burger Chef is probably only paying $26.75 an hour to start.
When the government decoupled the value of the dollar from hard commodities, i.e. gold and silver, and went into the business of inflating the paper money supply, it enabled inflation to eat into the value of those dollars, making it cheaper to pay off its debt. The price of everything must go up as the money supply is inflated. Regardless of any downward fluctuations, real estate has gone up so much over the decades because it is a real commodity. Plus, financing it with debt when there is money-supply inflation is a smart move, so speculation can drive it too high over the short term.
Why is oil $134 a barrel? Aside from inflation of the money supply, it is because global oil supply is unable to keep up with increased global demand. We are already approaching, or at, peak oil, and neither our president nor any of the candidates has an energy policy that addresses the tremendous upheaval of our economy as global demand for oil exceeds supply. (Unless you count occupying Iraq as addressing oil supply.) Oops. Wrong rant.
# posted by Jack @ 3:21 PM 
Comments:
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Your comments are intelligently written and understandable.
The first paragraph is a great explanation of the difference between supply and demand and inflation.
The Burger Chef analogy used figures that I'll probably be ripping off to impress others later, even if only slightly.
Good stuff.
The summation describes the effects of our government's unique ability to incorporate meddling (inflation) and inaction ( no energy policy) to make a real mess.
If this is ranting, I'm a rant lover. Keep ranting.
It could also be intelligent passion. More!
The first paragraph is a great explanation of the difference between supply and demand and inflation.
The Burger Chef analogy used figures that I'll probably be ripping off to impress others later, even if only slightly.
Good stuff.
The summation describes the effects of our government's unique ability to incorporate meddling (inflation) and inaction ( no energy policy) to make a real mess.
If this is ranting, I'm a rant lover. Keep ranting.
It could also be intelligent passion. More!
This was written at a peak in gold and oil prices, though gold has since gone higher. After the collapse of oil to only $40/barrel and gold to around $720 and ounce, the equivalent minimum wage would "only" be $31.93, and the Burger Chef owner would only be paying a miserable $19/hour.
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