Budget talks: This is getting nasty

And the real story is. ... fuel prices.

Airlines are shitty businesses. They operate with incredibly low margins in an effort to compete and by far their single biggest cost is fuel and it hammers them in times like this. Their fuel costs are up 26 percent in the last year. In the last three months, they have paid 58 percent more for fuel than they did the in the same three month last year. That affects fares more than anything.

Jet blue reported today and revenues were up 22 percent. Yet earnings fell 19 percent. Rising fuel costs. Fuel costs are what are raising fare prices. Not "greed" or ingratitude for an FAA tax glitch. You can't look at that in a vacuum. Fares are increasing at all of those airlines because costs are rising steeply. Ignoring that and pointing out that they are raising fares despite the fact that there is an FAA tax reprieve, ignores what is going on in that industry overall right now. Their costs are skyrocketing on them.

 

That depends on how you look at it. The cost of oil is just going to increase over time, because of depleting reserves and generally increasing demand.

But oil today climbed back over $100 a barrel (mostly because the dollar weakened, I reckon) and this is happening in an environment in which half the world's economies are crawling and the rest are slowing down. So while supply is depleting every minute, demand is not particularly strong, in a relative sense, compared to say 2006 or 2007, before the economic meltdown, when all the world's economies were strong and demanding lots of oil, and the emerging markets were growing like weeds and sending the price to record levels.

The fact that oil is getting more expensive in a slow world economy tells me that we are seeing what no one is willing to say yet: stagflation. The other instance of stagflation in my lifetime was compounded by an oil shock, by the way, in the 1970s. We are going to see slow economic growth for a decent amount of time because we--and others--have spent ourselves into debt and that debt, and efforts to reduce it, are going to limit growth (and employment). At the same time, as government always does--in the modern day case, via monetary policy--the Federal Reserve has embarked on a reckless policy of trying to inflate away that debt by devaluing our currency. They took it way too far even before their last quantitative easing, and every day they keep interest rates artificially low, they compound the problem. Their toolbox is worthless and it hasn't, nor will it, buoy our economy. So we can look forward to slow economic growth and high unemployment, and because of Ben Bernanke and his cronies, we are already seeing, and will continue to see increasing inflation, which is supposed to act inversely to the economy, but doesn't in the case of stagflation. With that inflation, we are seeing prices -- of just about any commodity or hard asset -- rise, and that will be particularly true of something like oil, because there is decreasing supply and fewer and fewer reserves.

The evidence is easy to see. We are at $100 a barrel in an atmosphere in which just about the whole world expects VERY slow U.S. and worldwide growth in the second half of this year. In a low-growth atmosphere, if they hadn't let the inflation horse out of the barn, the price wouldn't be rising.

 

"I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments."
-FA von Hayek

He'd be shaking his head right now at peoples' inability to learn once and for all.