Tuesday, May 15, 2007

what does gas have to do with it?



Yesterday I talked about the price of gas, discretionary spending, the economy, and housing prices. The Sun must be reading here because today, they have a story about the gas prices, inflation, and real estate.

Inflation is here, no matter how well hidden. Fuel prices are going to bring this all down, forget about jobs, interest rates, etc. Everything costs more when fuel costs more. Everything.

Think about those who bought in the valley after carefully budgeting, and realizing that there is now $100/month extra (or more) in commuting costs. Oops. Food is up too. So is home heat (but that won't be fully realized until next winter). What does $200/month more do to that budget? Lots of macaroni, I'd wager. Those that stretched to buy may find it impossible to keep up.

Are fuel prices perhaps going to be our "external factor" to change psychology? When inflation is finally admitted, interest rates will go up, employment will go down. The housing market will cool, and reverse.

Read the article (between the folksy lines), and make your own deduction. The summer driving season has not even arrived yet. Will gas be $1.50/L then? Sorry about yer tourism.

$5.85 an imperial gallon is a king's ransom

Pete McMartin, Vancouver Sun
Published: Tuesday, May 15, 2007

The bad news is, I am now spending $1.30 for a litre of gasoline.

The good news is, I am now spending $1.30 for a litre of gasoline.

How to square those two sentences?

Thusly:

I live in Delta, which, for some reason I really don't care to know, has the highest gasoline prices in the Lower Mainland, and therefore, quite possibly, in North America.

For those monarchists who still calculate the weight of their rib roasts in pounds and not kilograms, that $1.30 per litre works out to $5.85 per imperial gallon, a king's ransom. British Columbians' gouging at the pumps now rivals that of the British themselves, whose astronomical gas prices we once took a strange, self-satisfied comfort in, regaling ourselves as we did with breathless stories of the exorbitant amounts of money the Brits would pay to run their Vauxhalls. Tsk tsk, you could hear us say. Seventy-five dollars for a fill-up! How could the poor dears do it? It made us feel good about ourselves as we cruised the Safeway parking lot in our Hummers.

Those days are over, never to return again. The price might fall from today's vertiginous heights, but not so much that we will ever be able to approach a gas station again without a sense of dread.

For suburbanites such as myself, who must commute, this will mean an added economic burden.

For lower-income families, who have been forced into the suburbs by high real estate prices, it may mean the difference between owning a second car, or a home. For a hot economy like Canada's, rising gas prices could mean an inflationary spiral.

22 comments:

chrisnott said...

Will this mean that real estate prices in the distant commuter belt will go down or that prices in the inner city will go up? My guess is the latter. And given a choice between buying a house or a second car, typical North Americans will go for the car - our drive to own a house with a yard and picket fence is strong but it's over-shadowed by our need to own a car. When you were young, which did you want?

Real estute said...

I cannot agree with the idea that fuel costs will make any bit of difference in RE values. We've been paying sky high gas prices for what, 3 years now? RE has only soared along with gas prices. If the high cost of fuel brings the economy to its knees, yes then we will see RE values affected. My 2 cents.

Patiently Waiting said...

I think Vancouver is going to see a population drop. The long commutes are made all the worse by the price of gas. You can move to a smaller city and drive to work in 10 or 15 minutes and save on gas. Employers will also join the exodus, meaning even more people forced to leave.

I honestly can't understand why so many stick around this nasty city.

solipsist said...

Thanks for your comments.

"Will this mean that real estate prices in the distant commuter belt will go down or that prices in the inner city will go up?"

They're all going down - sooner or later.

"If the high cost of fuel brings the economy to its knees"

I don't know if it will do that, but certainly, cause it to swoon and stagger - IMHO

"I honestly can't understand why so many stick around this nasty city."

I think of my egress pretty much daily. If only winter wasn't so egregious in other parts of the country.

snubby said...

I don't understand how the price of gas increasing has anything to do with inflation?

solipsist said...

"I don't understand how the price of gas increasing has anything to do with inflation?"

The short, simplistic answer is that everything that we buy is transported by truck, ship, plane, or train. When fuel prices go up, the shipping costs are tacked on to that cauliflower, jeans, beer, wine, computer, flight, DVD, CD, new roof, sheet of plywood, box of nails, etc. that you buy.

Home heating also follows the same path.

Gasoline and diesel fuel have gone up by well over 30% in the last year. Thus, so have commuting costs.

Steak, hamburger and dog food all cost more than they did last year.

snubby said...

So prices of some goods are increasing because the price of oil is increasing. I don't think this necessarily have any correlation to inflation whatsoever. The price of some consumer goods (oil, food, etc.) can still increase during a disinflation or deflation.

solipsist said...

snubby,

you can read about it here.

They (StatsCan) will explain it better than I can. But I must admonish you to look further. Google inflation, gas prices, CPI (pages from Canada) and do some reading.

Caveat Lector - cheaper skirts for women, and non-alcoholic beverages helped bring down inflation in April 2007. How many people buy new bras, and more diet cola because the prices went down.

Although it cost more to fill up the tank and to maintain a vehicle between March and April, the 0.7% drop in the price of vehicle purchases and leases offset the upward pressure on the monthly all-items index to some extent. Vehicle manufacturers continued to enhance incentives offered to new vehicle purchasers, thus bringing down prices in relation to the previous month.
...
The all-items index without energy components advanced by 2.4% in April, up from 2.1% in March. This was the strongest year-over-year rise posted by this index since May 2003.

...
Vehicle manufacturers continued to enhance incentives offered to new vehicle purchasers, thus bringing down prices in relation to the previous month

What this means is that, now, you get heated mirrors and a stock CD player thrown in. Does that make your car so much better? That is the kind of crap they use to mitigate the reported inflation. Instead of having a noisy dial to turn on your washing machine, it has push buttons now. That makes it worth more.

It's all smoke and mirrors.

Now, if energy costs had not been excluded, we would see inflation @ 6%-7%, I'd guess.

As an aside, mortgage rate inflation is 5%

snubby said...

Well I'm confused because I thought we were at the point in the business cycle of disinflation, soon to turn into deflation, which would account for the growing discrepancy between high order goods prices and low order goods prices. The increase in prices of some of these items will continue whether or not the money supply is increasing. I am just learning, but are these price increases really have anything to do with "inflation"?

snubby said...

don't we really have huge credit expansion rather than monetary inflation?

patriotz said...

don't we really have huge credit expansion rather than monetary inflation?

Both I think.

The point you're missing Snubby is that it is quite possible, and indeed can follow logically, that you can have asset deflation at the same time as consumer price inflation.

For example, in the 1970's, which were the time of the largest CPI inflation we've ever seen, there was an extended bear market in stocks.

With respect to housing, the more consumer prices rise, the less the prospective purchaser has left over for mortgage payments, so house prices fall - given stagnant wages, which I think are pretty much a... given.

snubby said...

patriotz said...


"The point you're missing Snubby is that it is quite possible, and indeed can follow logically, that you can have asset deflation at the same time as consumer price inflation."

I agree with this. Maybe my confusion is the term "price inflation",which doesn't necessarily have anything to do with monetary inflation. So when people say that "inflation" is higher than reported, they are simply referring to this "price inflation" - and then really it only relates to perhaps a few items. Maybe if rising prices on a few items was not termed "inflation", it wouldn't be so confusing.

There was actual monetary inflation in the 1970s, that lead to increase in wages, prices, etc. We are at a different time, no? This is a huge credit bubble?

I know there are a lot of different economic theories, just trying to learn.

solipsist said...

snubby said - There was actual monetary inflation in the 1970s, that lead to increase in wages, prices, etc. We are at a different time, no? This is a huge credit bubble?

I am starting to see where you are going.

I can't speak to "monetary" inflation in the 70's - I know that money was scarce for me in the latter part of that decade, as I started my working life.

What I am talking about is price inflation - as in the Consumer Price Index, which is a measure of what today's dollar will buy today.

This is a monstrous credit bubble - in my opinion - which is leading us to a major economic crash. I could start to ramble about my views as to why this is happening, but they are not fully formed yet.

I believe that the US rewrote it's bankruptcy laws some time ago in such a way that one is not absolved of one's debt through the process. I don't know/care a lot about that, but it is a thread in a string of events - I think. With the increasing totalitarianism and fascism in the Western world, I think a lot about debtors' prisons, debt and wage slavery, and the recouping, and/or seizure of privately held assets.

That is a topic for an alcohol sodden, late-night debate though.

casual observer said...

"There was actual monetary inflation in the 1970s, that lead to increase in wages, prices, etc. We are at a different time, no? This is a huge credit bubble?
"


We are facing monetary inflation this time around as well. The broad measure of money supply in Canada, U.S., U.K., etc. has been growing at double digit percentage rates for the last few years. link It's interesting, and a little troubling that the U.S. just stopped publishing M3 last year. This is the measure of their broad money supply. Their reasoning was that it was no longer necessary.

This has been occurring while GDP growth has been low single digits. This increase in money supply has devalued the currency. If the money supply increases beyond GDP growth, inflation will follow. This is reflected as rising prices. My dollars will buy me less house, less gas, less food, etc. This is price inflation.

The main vehicle that is used to inflate the money supply is credit growth. That is why we have a "credit bubble" at the same time. The reason that credit growth is necessary for monetary expansion has to do with the fractional banking system. link

Without going into too much technical stuff, just know that banks are required to hold in reserve only a fraction of what they take in on deposit. This typically has been around 10%. (ie - if they take in $100 on deposit, they can loan out $90 of that money.)

Beginning in the mid 1990'S, these reserve requirements were relaxed quite a bit. In some cases they were removed altogether. With these changes, the monetary constraints which prevented an almost unlimited expansion of the money supply were essentially removed.

Now, the only real constraints are the consumer's willingness to go into debt, which banks have been trying to influence agressively over the last few years. I actually remember having to sit down with a banker and explain why we wanted to get my wife a credit card with a $500 limit for emergencies. Of course, this was 20 years ago. Now, anyone who can fog a mirror can get a credit card.

casual observer said...

This is a comment that I posted on Mohican's blog a while back. It might be of some use.

"It is not surprising that we are experiencing asset bubbles around the world due to the enormous growth in money supply (credit).

If you took a graph of RE prices in Canada, and overlay a graph of mortgage debt, you would find that they are highly corelated.

As Ron Paul says, inflation (rise in prices) is caused by excess growth in money supply. If the economy is growing in low single digits, and money supply is growing in double digits, this will cause inflation.

It's just that the gov't and some economists refuse to label a rise in asset prices as inflation. Those that do, often call it "good" inflation, as it causes peoples investments to rise in price.

Usually the bond market would correct this before it got to the bubble stage, as bond investors would take note of this increase in money supply, and bonds would sell off, causing interest rates to rise, slowing the increase in credit (which is how the money supply grows).

This would normally choke off the speculation before it became too rampant. This has not happened this time, as a lot of this extra money has made its way back into the bond market by way of foreign central banks recycling of their excess foreign currency reserves.

They do this so that their own currencies (Chinese yuan, Japanese yen) do not rise in value against the currencies of the countries that buy their products. This recycling has allowed the bubble to inflate much larger than would have otherwise been possible.

On top of all of this, because of the free flow of money, there are speculators who will borrow money in Japanese yen (at near zero interest rate), or some other currency where the cost of borrowing is low. They will then use that money to buy the bonds of a country whose interest rate is much higher (US, New Zealand, Canada,etc.)

This also adds fuel to the fire, as it keeps long term interest rates artificially low. This keeps the cost of long term debt (mortgage) low, and allows for more people to compete for a limited supply of houses. Demand goes up, and prices rise. This causes people to take on more debt, which causes the money supply to increase. A vicious cycle perpetuated by cheap credit."

snubby said...

There was a discussion last week on Mike Shedlock's blog about how the money supply as measured by M1 is actually decreasing, although the credit (debt) as measured in M3 - is increasing. I think the point was that these are two separate items and are measured in a different way, money included in savings, which is of course now negative. This is a different circumstance than in the 1970s which had rampant monetary inflation, not a credit bubble. Today of course we have debt and no savings, and money supply is decreasing.

snubby said...

I wanted to say I know there are vastly different opinions on this topic, but it makes sense to me

solipsist said...

Thanks to casual observer and snubby for sticking with this, and expanding on it.

Economic theory is like Lithuanian to me.

casual observer said...

"Today of course we have debt and no savings, and money supply is decreasing."

First of all, M3 is the broad measure of money supply. It includes M1. M3 is not a measure of debt (credit). Credit is the vehicle that the Central Bank uses to expand the money supply, because we live in a highly indebted society. It's important to remember that every dollar taken out in debt, ends up being added to the money supply (ie - that debt is used to purchase something or pay someone).

Money supply is NOT decreasing, it is increasing by over 10 percent per year, while GDP is growing at only about 2-3 percent per year.

This is monetary inflation.

M1 only refers to a very narrow definition of money supply (currency in circulation, checking accounts, etc.). It is not the measure of a country's money supply. Check out those links I posted. They explain quite a bit.

DEFINITIONS OF M0, M1, M2, M3 - From Wikipedia.

The most common measures are named M0 (narrowest), M1, M2, and M3. In the United States they are defined by the Federal Reserve as follows:

M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.

M1: M0 + the amount in demand accounts ("checking" or "current" accounts).

M2: M1 + most savings accounts, money market accounts, small denomination time deposits and certificate of deposit accounts (CDs) of under $100,000.

M3: M2 + all other CDs, deposits of eurodollars and repurchase agreements.

As of March 23, 2006, information regarding M3 will no longer be published by the Federal Reserve, ostensibly because it costs a lot to collect the data but doesn't provide significantly useful data[2]. The other three money supply measures will continue to be provided in detail. On March 7th, 2006, Congressman Ron Paul introduced H.R. 4892 in an effort to reverse this change.

patriotz said...

It's important to remember that every dollar taken out in debt, ends up being added to the money supply

That's not true all all. Suppose you go out drinking with your friend. In scenario (a), each of you spends $10 on drinks. In scenario (b), your friend forgot his wallet, so you lend him $10.

Each scenario incurs the same economic impact - and makes no change to the money supply - but in (b) your friend has taken out $10 in debt.

Money supply increases when the central banks loan money to the government or other parties.

casual observer said...

"That's not true all all. Suppose you go out drinking with your friend. In scenario (a), each of you spends $10 on drinks. In scenario (b), your friend forgot his wallet, so you lend him $10.

Each scenario incurs the same economic impact - and makes no change to the money supply - but in (b) your friend has taken out $10 in debt."


You are mistaking the difference between what happens when friends borrow money between each other, and when a person, or entity borrows money from a bank. When a bank gives a loan, money is created by the very nature of the fractional reserve banking system.

QUOTE FROM http://en.wikipedia.org/wiki/Money_supply

Of the money in a bank deposit, depending on reserve requirements, either the whole sum or some fraction of it can immediately be lent out. The borrower can buy an asset and the seller of that asset can place the proceeds in another money supply constituent deposit. The money supply has just increased, because both the original and secondary deposits count as part of the money supply. That money can therefore continue to increase many times over.

"Money supply increases when the central banks loan money to the government or other parties."

This is also true. It is done by the central bank buying government bonds.

casual observer said...

I found this quote when checking out http://en.wikipedia.org/wiki/Fractional_reserve_banking

"Many Countries have even gone to a zero-reserve banking system, as Canada did in 1991."

I knew that banking reserve requirements were relaxed in the 1990's, but I wasn't aware they were relaxed that much.