The Economy

Inflation is purely a monetary phenomenon. Look at M2 money supply and it SHOULD tell people everything they need to know.



Politicians play into it, in so much as the Federal Reserve monetizes debt, which enables politicians to spend more and more on the back of all of the debt at the government level.

But of course prices have been rising for decades, particularly since Bretton Woods during Nixon's adminstration got rid of the last vestiges of sound money.

At the same time, though, we have been going through an extraordinary period of technological innovation during my lifetime. Our standards of living should have been going through the roof on the back of all of the innovation -- leaps you would see over hundreds of years in the past are happening in decades and less now -- and the productivity gains that should be bringing about should have had us in a glorious period where prices were going down, while people were living better and better.

Instead. ... we've been robbed of that prosperity, and the schemes they have used to increase that money supply (namely creating money out of thin air and using it to buy up debt issuance) have accrued benefits to people who could afford to speculate -- i.e. it has made the rich richer and left everyone else stagnating. Wealth inequality.

Prices rose, but not as dramatically as they might have on the back of all of that M2 money supply, because it was partially being offset by all of the productivity gains. Plus, they largely concentrated it in certain places, for example in the cost of housing (buying up mortgage-backed securities to spur more and more lending, which sent home prices through the roof), and they would just change their inflation measures to pretend like the runaway prices in those sectors weren't important.

The pandemic overwhelmed the balance they had found for a decade and a half. We started fiscally spending way more, and they went berserk monetizing debt. Which is why the line in the graph above goes vertical in 2020. At the same time, all of the malinvestment they have created over the prior decades came back to bite us in the ass, because investing in real assets was punished for so long that when the demand they created with all of that money they sprinkled around hit the supply chain, we hadn't done any investment in decades to meet that demand. Which creates shortages. ... and has made everyone see the effects of all of that money. Way too much artificially-induced demand on the back of increasingly worthless money. ... and not enough supply. And surprise, it takes more and more of all of that fiat money you have created to buy anything.

Welcome to relationships that people had pretty well figured out a century and a half ago.

 

Here is the thing about gas prices. ... demand for gas is still well below where it was prior to the pandemic. Yet prices have gone up marketedly and may continue to.

The pandemic was certainly a catalyst, in that the E&P companies laid off a lot of people when the pandemic hit and U.S. shale production has decreased. So supply is off of where it was, and it is more than offsetting the decreased demand (many people still at home, not commuting), and thus, rising prices. At the same time, OPEC is in control because we are importing more oil than we were.

That is a straight "analysis" of the situation. What gets lost in that is what happened in the decade and a half leading up to the pandemic. The U.S. shale industry loaded up on cheap debt on the back of mispriced debt markets in order to drill baby drill. They were operating unprofitably -- for many of those marginal wells all of the debt spurred, they were losing money on every gallon of oil they pulled from the ground. But like a lot of zombie companies -- the malinvestment I talk about -- they existed on cheap debt. The overproduction in the U.S. drove the price of oil down, and the farther the price went down, the more those shale drillers had to drill to just service all of the debt they had racked up. Without the Fed fucking everything up, many would have just gone bankrupt (the way overindebted companies do when they get in over their head), which would have brought the supply down, stopped the glut they were producing and made prices rise. But we went from the financial crisis until recently monetizing so much debt that we created a survival of the unfitest environment. And nobody was allowed to go bankrupt. We just robbed savers to allow every entity in over its head in debt to keep rolling over the debt at negative real interest rates -- in another words, they could borrow more and more for cheaper than free.

That all culminated when things were beginning to implode just around the beginning of the pandemic, the repo market was about to bring about a debt crisis, and the futures price of oil went negative. Remember that?

What we needed at that moment was all of the bankruptcies that are going to have to happen to heal the mess they have made. Instead, they did monetary bailouts. ... Survival of the unfittest on steroids. And all of those shale drillers finally sobered up a bit, because their ability to keep borrowing more and more has been curtailed in the wake of the pandemic, even with all of the debt the Fed is encouraging. They are a HUGE credit risk and everyone knows it. At the same time, with oil at $70 a barrel, then $80, now pushing $85, they are profitable. Which allows them to service their debt in a much less artificial way.

The problem now is that we were living a fantasy for along time. Oil was artificially cheap on the back of a debt bomb we built. Now we have pulled back on that fantasy a bit, and even with decreased demand, we are getting more of a taste of where oil prices should have been all of that time. We aren't pulling as much from the future on the back of exponentially more and more debt to the present to live a fantasy (with shale drillers operating unprofitable, running up massive debts and producing way-too-cheap oil). ... and this is what happens.

That isn't going to end soon. ... UNLESS we do more of the what caused a coming debt crisis, and that is short-term thinking because the longer you live the fantasy, the worse the eventual payback is going to be.

With our shale companies not overproducing the way they were artificially, it leaves us begging the middle east for more production (they can do it way cheaper). And they aren't going to necessarily cooperate. Which creates supply / demand dynamics that are less artificial. Add in all of the monetary debasement, and in that environment, the price of oil is not a few months aberation. It's more a reflection of what should have been and what should be a permanent reality.

 

OPEC is cartel. It tries to fix prices (by limiting supply to the market) to maximize what its members can earn.

OPEC became less of a problem for us when we had more than a decade of overleveraged U.S. producers on the back mispriced debt, drilling so much that those companies were losing money on the oil they were pulling out of the ground and creating a glut. It culminated with those companies on the brink of bankruptcy in May 2020 and drowning in enough debt that that was a threat to our entire economy.

Cut to today, and the dynamic has cmpletely changed. They are not being subsidized to produce oil below the cost of production on the back of more and more debt the way they were. The industry got leaner by necessity. ... because the pandemic made the lending markets seize up on them. The Fed managed to stave off a lot of bankruptcy by creating an insane amount of money and becoming the buyer of last resort for much of that debt -- and right now they still have the overnight rate at 0, are buying $120 billion of bonds a month and they do repo operations of more than a billion dollars every day. But the fantasy everyone was living in which companies were loading up on debt and drilling oil at a loss ended with the pandemic.

That puts OPEC back more in the driver's seat with their cartel.

I'm not sure what the point of the "United States" thing is. Did you think we have a nationalized oil company or am I missing something? To the extent that we produce oil IN the United States, it weakes the cartel and allows more supply into the market. The reason those non-cartel producers don't produce the way that the middle east does to try to break the cartel is that it is way more expensive to get the shale oil out of the ground in the U.S. than it is for say the Saudis to drill profitably. The fact that we artificially induced a lot of unprofitable production for so long (and created a debt bomb in the process), brought the price of oil down for a while. It was also an unrealistic, unsustainable fantasy.

It's the opposite of the cartel that is trying to supply less to drive up prices. ... we have a central bank that made debt so cheap that it incentivized domestic oil producers to way overproduce on the back of a staggering amount of debt. ... and it drove down the price. That came to an end. ... and even though demand for oil hasn't fully recovered, without that overproduction, prices have been swinging higher on the back of less production -- back closer to where they would have been for the last decade plus without the artificialty.

 

Oh. I didn't get that.

Yeah, it was a myth. There are all kinds of ways you can pull growth from the future to live fantasies in the present and we have covered many of them over the last couple of decades of monetary madness. The shale revolution was simply a lot of zombie companies living on debt. ... and it creating a relative supply glut of oil that brought prices down for a time.

It's not quite the "big oil" narrative, I now know you were trying to come to. They're neither darth vader nor Mother Teresa is the reality. In an actual free market, they would be looking to pull oil out of the ground to meet demand profitably. In a distorted market, they will load up on debt like everyone else if the money is cheaper than free (in real terms) to try to take advantage of the environment and produce more and more using that debt. ... and that created supply imbalances that weren't a matter of design on their part as much as they are the unitended effects of the monetary mandarins who think they can design something they have no clue about.

 

Microsoft Cloud strength drives first quarter results - Stories

Microsoft just reported earnings, and in the statement they put out, Satya Nadella said, "Digital technology is a deflationary force in an inflationary economy."

It's along the lines of what I said in a post this morning. With the technological gains we have seen over the last several decades, and the productivity gains it should have led to, prices should have dropped dramatically during that time while standards of living rose. Instead, our monetary mandarins were at work robbing us of that effect.