What is the root cause of inflation? Is it monetary or energetic? Will inflation ever stop? Should you invest your savings in Bitcoin?
Debt and Energy
Shift Project director Matthieu Auzanneau argues that the decline of conventional oil, first in the United States from 1970 and then globally in 2008, is behind the crises of 1973 and 2008.
The scarcity of the queen of energies would be responsible for the headlong rush of indebtedness. The fruits of the lower branches picked, the remaining naphtha becomes more and more expensive to extract.
This analysis contradicts the widespread idea that inflation is solely a monetary issue. As such, the following graphic is often circulated to support this thesis:
Some believe that the decorrelation between wages and productivity (GDP/number of hours worked) is linked to the end of the gold standard in 1973, which would have allowed the United States to wallow in debt. The resulting inflation would have artificially inflated GDP, which would explain the growing gap between productivity (GDP) and wages.
It is an idea. However, another explanation emerges if we look at the origin of productivity. The latter comes mainly from the use of machines that need energy to operate.
More expensive energy, moreover purchased abroad, would suffice to explain this decorrelation. This is good since it is precisely this scenario that hit the United States from 1970 and the world in 2008.
Oil and inflation
Matthieu Auzanneau explains on his blog OilMan that oil is THE limiting factor that led to inflation, the 1973/2008 crises and, ultimately, the headlong rush of debt.
“The primordial and common cause of the two most serious crises of the last fifty years seems to me to be the reaching of a limit and the crossing of one and the same threshold without return in access to the main fuel of the current regime of growth. : oil. »
Mr. Auzanneau does not deny the reality of the real estate bubble of the 2000s. “Bubbles are constantly forming. All do not explode »he wrote.
Indeed, many households with poor credit lured by dishonest variable rates were unable to honor their bills after the Fed raised its rates:
“The peak, the compression which obviously burst the “subprime” bubble is the rise in the Fed’s key rate, from June 2004 to July 2006, leading to massive defaults. »
True, but why did the Fed raise rates at the risk of strangling millions of Americans?
Because inflation was soaring. And what was the main reason behind the rise in inflation?
energy cost
This is what will be systematically highlighted by the Fed at the time: the rise in the price of oil which began in the mid-2000s.
The price of a barrel doubled in the space of two years, going from about 30 dollars in 2004 to more than 60 dollars in 2006. It will reach 120 dollars during the summer of 2008.
The contribution of energy costs to inflation from 2003 to 2008 was “around 40% on average”. Mr. Auzanneau also points out that inflation not only forced the Fed to raise its rates, but that it also directly impacted the solvency of millions of households.
First those who lived far from city centers (due to long and expensive car journeys). Then the entire economy, hit by a crude price five times higher than usual. This inflationary shock will force many companies to poach, causing more defaults on mortgages.
For the director of the Shift, “the price of oil is responsible for a violent unanticipated inflationary surge, which itself caused the abrupt and unanticipated reaction of the Fed”.
Thus, the root of the evil would be the “end of easy oil” due to “the natural evolution of underground crude oil reservoirs”. It is this natural constraint that causes inflation.
The end of cheap oil
After having virtually stagnated from 2004 to 2008, that is to say during the entire period of rising prices, the world production of conventional oil finally crossed its peak in 2008. Knowing that this “conventional” oil (inexpensive to be extracted) then represented 90% of world oil production.
Far from being new, this inexorable phenomenon is linked to the decline in annual discoveries of conventional oil. It was even accurately anticipated:
“Deducing the physical, technical and ultimately industrial implications of these symptoms, then already old, two eminent oil experts, the British Colin Campbell and the Frenchman Jean Laherrère, announced as early as 1998 the peak of 2008, and even predicted its exact date. »
Many major conventional oil producing areas went into decline during the 2000s. “wells in the North Sea in 2000, Mexico in 2004 and the whole of the African continent in 2008”.
It is the end of easy oil which biofuels, expensive heavy oils (Canada and Venezuela) and other shale oils will replace. The “miracle” of shale oil allowed the United States to double its crude oil production, which today reaches 11 million barrels per day.
It is this additional supply which calmed the price of oil (40 dollars for a barrel in 2015) and which will allow the world economy to start again for a turn.
This graph speaks for itself:
What impact for the dollar?
The major consequence of the decline in oil production in the United States was the widening of their trade balance since it was necessary to buy oil abroad.
This deficit will worsen further from the 2000s before being absorbed thanks to shale oil. Uncle Sam still has a cumulative deficit of $15 trillion since 1970, when it peaked in oil production:
The interested reader will certainly wonder why the dollar’s exchange rate has not collapsed alongside this gargantuan trade deficit. The reason can be summed up in one word: Petrodollar.
The United States succeeded in 1975 in persuading Saudi Arabia and OPEC to sell their oil exclusively in dollars and to recycle a good part of their trade surpluses (“petrodollars”) in US debt.
Oil being the main source of energy essential to any industrialized nation, the dollar has become the international currency par excellence.
Along the way, it is today 7,000 billion dollars that the surplus nations have invested in the debt of the American government (31,000 billion dollars in all, of which 6,000 billion bought back by the Fed).
This is as much money coming back into the US economy and helping to keep the dollar’s exchange rate afloat.
But everything is paid for one day. The weaning of the United States will only be more violent when nations stop buying US debt.
This is precisely the path the world has been taking since the start of the war in Ukraine. Many nations are taking advantage of the Russian show of force to deviate from the greenback.
And in the end, it’s hyperinflation
Oil is the queen of energies. Its energy density has made it the fuel for 94% of global transport. Not to mention the plastic that we now find everywhere.
Unfortunately, given the growing decline in oil production, ever-cheaper finds, and shale oil already appearing to be peaking, it is possible that oil will have peaked in 2019. inflation that only a recession can slow.
The future looks dark for Europe, whose natural gas production and oil imports have been declining for twenty years.
It is indeed difficult to increase productivity with less energy. And producing less means that the debt and its interest will not be repaid. This is the end of the fiat ponzi based on the myth of infinite growth.
The solution found since 2008 is to run the printing press. But it is a headlong rush. It will end in hyperinflation quickly followed by payment defaults. Like after World War II…
Raising interest rates will not help. The reason being that the debt service will explode, forcing more debt to the Weimar Republic.
Bitcoin does not offer a solution against energy scarcity. But it is not backed by a multi-hundred trillion dollar ponzi absolutely dependent on our energy production.
In the face of looming hyperinflation against the backdrop of world war, Bitcoin offers an uncensorable, stateless, and anti-inflationary refuge.
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