Sunday, October 19, 2008

Unknowns: Inflation, Deflation, Peak Oil, Climate Change...

This is just a little diversion from the main focus of this blog to look at the big picture.

A lot has been going on in terms of trying to prop up the world financial system and it is unclear what impact these actions will have going forward.

Google image search source lewrockwellblog

One thing that I cannot sort out is deflation vs. inflation. It is clear that deflation has been winning recently. Good news for me, my salary is in dollars and houses and stocks become cheaper. Saving for a downpayment in cash is working, even at low returns. Go bears!

However, I have anxiety over what I don't understand. I don't fully understand where this money is coming from to bail out banks worldwide and to 'provide liquidity'. Perhaps there will be a delayed reaction and inflation will return.

So in the short term it appears that the credit crunch is resulting in a reversal in leverage causing deflation. However the impact of the desperate solutions by those in power is a concern to me in the medium to long term. Are savers going to be coerced to invest through monetary policy?

Google image search some blog post I added to bloomberg LIBOR chart

There is a view that the energy industry, and specifically the tarsands, will keep Alberta's economy insulated to some degree. I think that some of this growth was the result of distorted demand from the United States living greatly beyond their means. There are those that have said American personal, government and trade deficits are sustainable with lines such as "America is the largest economy in the world" and "World reserve currency". I have my doubts.

Imagine a world where money is a method for trading goods and services and ignore for a moment the apparent permanent imbalances in US monetary policy. I know this sounds foreign and simplistic but bear with me. Extracting oil from the tarsands is expensive in terms of resources such as labour and capital. Consider the sacrifices made by people working long hours, living in camps far away from home. How much capital is being invested to retrieve this energy? If money is an exchange for goods and services what will Americans offer in the future to us for all this hard work? During the housing bubble they would remodel their kitchen, take out a home equity loan and buy a Hummer. Now what?

google image search Texas REALTOR
Google image search some Bloomberg article

In regards to oil there are two wild cards. Oil is a limited resource and therefore could use more of people's incomes to sustain marginal production methods such as the tarsands. At the same time policies to combat climate change could promote alternatives.

What impact will inflation, deflation, peak oil and climate change will have on the Alberta economy and nominal real estate values going forward? Any thoughts?

9 comments:

squidly77 said...

in my opinion we have been in a sustained period of rampant inflation..home prices have been going up at a crazy rate of speed
people are not going to realize just how much debt they are actually in until its to late
i do believe that short term the BOC rate will remain low (could go to zero) however mortgage rates are going up
when the job losses start coming to calgary then people will see just how screwed they are
how long would it take you to save $400,000 ? and at the same time pay 7% carrying costs @ $2,333/mo
a very very long time for sure
inflation or deflation
i dont believe in the elliot wave theory how ever this small piece sums deflation or inflation
make your own conclusions

Anonymous said...

Squiddly77 is the Alberta all-star cheerleader of the Great Alberta Bust of '08.
I wonder what he's gonna bitch about after the bust is here?

Bob T.

BearClaw said...

anon,

What!? Make your own blogger profile so you don't have to use other people's names Bob T., Gloria, etc.

Anonymous commenting is off but now you don't need to type in word verification.

curt said...

we are in a deflationary environment that should last for at least 12 mths. Inflationary forces will eventually show up as it takes time to work thru the system. For alberta, a deep and projected recession is not good for energy. Demand destruction is here and we can expect sub $80 oil for an extended period. Unemployment will raise in Alberta and Calgary inparticular. Ultimately, Alberta will be a good place to be as we turn the corner in 2 or 3 yrs, but in the mean time....it could be painful for a lot of people.

Sheldon said...

Buy my homes.

Sheldon said...

Squiddly77 is a funny retard...

Sheldon said...

Marc Perras speaks the truth!!!

Buy my homes!

Carioca Canuck said...

Bearclaw.....

Looks like I have to take you and your significant other out for a night on the town due to my losing our bet.

I'll gladly make good on it, but am going to my place in Rio de Janeiro tomorrow for 6 weeks, so I will contact you when I return to arrange a date.

BearClaw said...

cc,

Thanks for following up! Just comment when you get back.

Good to see Dion step down. That was a supreme failure. Take a look at this clip of Dion interview a few days before the election. The liberals were lucky he didn't bring the party down Kim Campbell style.

link