Sunday, June 15, 2008

Strange Inflation.....

I've been drinking bubble tea these few weeks. Why bubble tea? The prices have fallen from a high of $2.50-$4 in 2001 to $1.50. The duo-core laptop I was eyeing last year has dipped below $1000 to $890 at the recent PC show. I've been saving close to $300 a month on taxi fares as the fare hike inspired me to switch to taking public transport - yes I've learned to shut off my mind from the crowd and really focus on my free copy Today to timewarp myself so that the longer journey is more tolerable. If you have a lot of time there is a barber in Bedok (Block 631) who offers haircut at $2.80....I have not resorted to that yet I'm still paying $10 per haircut at one of those "Japanese" style 10 minute per cut barbers.
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Inflation.....what inflation?
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The recent CPI report from the US shows a large jump in headline inflation (0.6%) but no increase in core inflation which remains at 0.2%. Core inflation excludes food & energy and is the more important number as it tells us if inflation has begun to spread. In the US as in Singapore, inflation is very much concentrated in food and energy but has not spread to other things.
In Singapore I notice that the big jump in hawker price occurred after the GST hike and then stayed there. Similarly taxi fare hikes were one-off, that single hike probably caused demand to fall enough for them not to consider further hikes. I don't think they dare to hike the public transport & ERP cost anymore - the last hike pushed Singaporeans to the threshold of wanting to throw eggs at Raymond Lim. The point I'm getting to is we are not seeing the kind of infectious spread of inflation in the 70s. Business are unable to raise prices because the consumers are so stretched they will trade down, substitute or simply stop buying. American consumers are so stretched due to rising oil prices and declining values of their homes, any price increase will lead to a collapse in demand.
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The key difference between now and the 70s is the wage-inflation spiral. For the past 3 decades, the power of unions have waned and workers are no longer able to negotiate for higher pay. While this may seem like a bad thing for workers, when it comes to inflation, this lack of power to raise wages is key to preventing inflation from spiralling out of control. The vicious cycle goes like this - inflation = workers ask for higher pay = business raise prices = more inflation...and so on. Today when prices are raised beyond a certain level, demand collapses....the economist call this demand destruction.
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What about high oil prices?...can this go on forever?
On the day when oil reached $139 per barrel, I noticed a few interesting pieces of news:

1. Airlines announced withdrawal of a large number of routes due to high fuel prices.
2. Indonesia, Malaysia remove fuel subsidy because the govt could no longer "tahan" the cost. Overnight fuel in Malaysia cost 50% more. I guess Malaysians will be driving less.
3. I went to a Pasar Malam (night market) and every car was offered with a CNG option that will save the driver 60% in fuel cost. Several of my colleagues were pushed to switching to CNG cars
4. OPEC convene emergency meeting.

That $139 per barrel flicked a few psychological switches that might has seeded the demand destruction for oil. I've been looking at the cause of increase in price of oil - there are 2 key reasons I believe that have contributed to this. Contrary to what most people think, I believe that OPEC, Chinese & Indian demand are not the primary factors that drove oil prices from $27 to $139 in 6 years. The first reason is the consolidation of oil industry that resulted in the top 6 oil giants now producing more oil than OPEC. It is found that these giants have not increase production & refining capacity and they left a number of leases on oil reserves unused and these were taken back by the US govt. The reason is a 2% reduction in production leads to a 20% increase in prices and once the oil companies were consolidated with fewer independent players, there was little motivation to increase production - since they have much more to gain by not expanding supply, they simply allowed the price of oil to rise to maximise their profits. The 2nd reason is speculation - hedge funds, pension funds have poured billions into the commodities funds which can only go long (purchase) oil and commodities. The oil prices have reached a level that threatens the global economy and governments have no choice but to intervene in the marketplace or see their economies strangled by high oil prices.
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This is the point they call "make or break". Food and energy inflation will be defeated either with a painful slowdown or some intervention from govt. Already we are seeing riots in Indonesia, protests in Malaysia and S. Korea - it is time for governments to act fast or see more pain.


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16 comments:

Anonymous said...

that's from a supply side perspective. there is the growing demand which is more difficult to regulate without violating human rights and of course, the wealth warriors created by global insurgency

what can the government do really? apply erp wisdom and shift the pain?

the damages are in the thousands waiting to be heard every month in some subnormal courtesan chamber. the unreported number is even more staggering when you consider relational dysfunction attributed to lacks and insufficiency.

in times like this, we still ensure the fittest survive first before the others.

in times like this, it is good to have paid yourself, or your kind, millions!

yamizi said...

Lucky,

No worries, riots and protests happened in other countries have little to no chance to occur in our country.

Anonymous said...

please be reminded of ST classic quote: ask not what lky can do for you forever,instead, ask what you can do for lky now. lol.


i think i shall work harder so i can qualify to pay my taxes. lol.

Anonymous said...

Today when prices are raised beyond a certain level, demand collapses....the economist call this demand destruction. - Lucky

May be it would be more appropriate for economists to understand this as "marketplace correction".

Economic growth in developed countries has become a matter of businesses creating demand for their goods through a constant barrage of marketing spin and this in a marketplace that is already saturated with all kinds of offerings for many years.

At some point, this saturation of supply must come to a head. Just look, for instance, at the so many shopping centres in Singapore, and with still more coming up.

In the big Marina Square shopping centre for instance, some corner shops are only opened on weekend because there is no business during weekdays. This is the result of over-saturation of retail outlets in Singapore.

We have to ask ourselves whether we really need so many things or even multiple versions of the same thing in life - be it computers, watches, shoes, handbags ... I mean part or even much of these represent wants not needs.

The skyrocketing prices of oil which will definitely cause serious inflation in the days to come will bring back some good old thriftiness and allow excess supply to be flushed out of the market.

Just like the stock market when demand reaches a peak, a stock market correction occurs and this usually is turbulent in nature owing to the speculator class and near-instantaneous electronic trading.

The general marketplace is more secured from such immediate volatility. Thus the correction to excessive demand of goods will come about in a more gradual manner.

It might bring about a slow-down of economic growth in developed nations and this may turn the attention of the masses to seeking a new lifestyle - such as already been done by some urban Americans moving to the countryside for a slower life.

Much of the rise of commodity prices is caused by the hike in oil price. As such so long as an alternative fuel capable of replacing oil is not found or invented soon enough, a global economic slowdown is a real possibility.

Singapore will then experience in the years to come an exodus of foreign labour. People will go for smaller flats but as we can see the wonderful HDB is not thinking along this line.

Other scenarios you can also envisage in the area of retail trade, manufacturing, construction etc.

Has PAP which claims to have top brains worked out such scenarios based on the peak oil crisis? Peak oil means oil production already running at full capacity, if the many reports out there are to be believed.

If this continues, superpowers like the US, China and India might become even more deeply involved than now in the Middle East because of the oil reserves there.

The Bush administration had planned to attack Iraq and then Iran to secure the oil. The current problem with Iran over nuclear issue hides this diabolical intention.

For all the talk of alternative fuel, we are still captive to fossil fuel. The prospect of this continued dependence on oil can filled any thinking person with trepidation if only to know that oil price might reach US$200 within a year and thus send his home utility bill & car petrol expenditure through the roof.

Anonymous said...

The reason that demand continue unabated has to do with the big boys, India and China, which has yet to lift the subsidies, the rest are inconsequential.

Is the speculators to blame? Hot money continue to flow into commodities, no doubt, but for a moment think about what those oil traders are doing, the bidding that they do is simply putting a contract to pay for a delivery of oil at a future date, in an open market.

The crude that was brought are sold to refineries, as long as the refineries under no coercion, continue to see it profitable to do so, there no reason stopping them paying the stated price.

So are the trader to blame? Or are they just serving as intermediaries to unabated demand and dealing with limited supply.

Anonymous said...

Run a car on water :

:: to fracture water into hydrogen and oxygen with little electricity and then combust them. The inventor Stan Meyer was allegedly murdered in 1998. The inventor had filed patents for his invention in the US & other countries. LINK

:: this report is even more fantastic just released 13 June 2008 by Reuters LINK

Now if you can run a car on water with little electricity then you can in principle also use that to generate power for other usage.

But the problem is that there are very huge entrenched vested interests - like oil producing nations, oil companies and dealers - in the energy industry that will feel threatened by such inventions.

One way they can kill the inventions is to buy over the patents just to prevent them from being used. Another way is to cause the inventor to somehow disappear from the scene and no one will know where he has gone to - murdered, silenced through threats or buyout, whatever.

The world we live in is more than meets the eye. The mainstream media like the wonderful Straits Times will toe the conventional view that conspiracy theories are just hogwash and this includes rejecting the now widely accepted understanding that 911 was carried with the knowledge of the Bush administration. Type 911 in YouTube for a better idea.

I bet even the human rights groups are afraid to officially address such conspiracy issues because of powers behind them.

Anonymous said...

Mat 12:29 ......how can one enter into a strong man's house and spoil his goods, unless first he binds the strong one, and then he will plunder his house.

Anonymous said...

"But the problem is that there are very huge entrenched vested interests - like oil producing nations, oil companies and dealers - in the energy industry that will feel threatened by such inventions."

Who knows, may even start a world war over who should decide how you should live your life?

Anonymous said...

If US decides to attack Iran supposedly over the nuclear issue, will not PAP become an ally once again?

However Iran has very strong business ties with China, not least a US$70 billion oil contract in 2004.

China will not sit back if the US takes military action against Iran. India which is also hammering out a pipeline deal with Iran will also feel threatened and likely to respond against the US.

These countries have seen what happened to Iraq and who now controls it and its oil fields.

If WW3 erupts in that area, one reason is because nations have been set on the path of perpetuating entrenched oil-related interests, many of which happen to be state-owned.

Viable alternative fuels will continue to take 2nd place and under stringent control using safety and other legal issues as reasons.

LuckySingaporean said...

anon 10:20,

It is not possible to run a car powered by water alone. Stan Meyer 's car had a battery that was used to break down water into hydrogen and oxygen before it is used to power the fuel cell engine.

The Japanese Genepax car is equally misleading because the company official claims that it runs ONLY on water ...he explains that the water passes through a "membrane electrode". It is possible that there is a reaction of the water with this (say Metal hydride) to produce the oxygen + hydrogen. In which case the the metal hydride is consumed and has to be replendished.

It is not possible to run on water alone because the bonds in water is very strong. To convert water to Hydrogen & Oxygen, would mean another source of energy or chemical is used.

Anonymous said...

Haha, Lucky, you must be joking again. Surely when a car is said to run on petrol we do not think it needs no battery either.

So according to the subject reports, if with a little electricity from a battery or using a membrane of some kind, water can be broken down easily into hydrogen and oxygen and then combusted, then it is breakthrough.

What matters surely must be this : that energy output is much larger than energy input. This the scientific community says is impossible because it breaks the law of thermodynamics or whatever. What a fatalistic thinking unworthy of scientific minds!

At one time "scientific" minds also claim that it was impossible for man to fly.

I can't vouch for the 2 reports but one would think a reputable news bureau like Reuters must have done some homework before reporting on the 2nd case.

Actually in Singapore there is a company which already uses a very high temperature blow torch running on hydrogen and oxygen broken down from plain water. Such an application may however require lots of power for the electrolysis; besides the company said in a news report years back that the combustion of the 2 gases must be done in just the right proportions or there will be an explosion.

But in all, lets keep an open mind about breakthrough in inventions. Today we are all enjoying all the modern facilities because some inventors of the past believe in possibilities rather than impossibilities.

Cheers!

anon 10:20

Anonymous said...

Oil prices going up.

Inflation going up.

Prices of many good are going up.

But wages is going down.

Recently, I was offer a job, min requirement is a diploma holder, paying $1,200. Overtime is expected but it cannot be claim.

This salary offered was worst that 10 years ago in which a diploma holder without experience can get $1,600.

Ultimately, these companies will get people from China to fill up this position when no singaporean wants to accept it. Singaporean will be blamed for being choosy.

Should I accept the job?

Anonymous said...

Anon 7:29

$1200 and no overtime pay is worker exploitation. I know this is rampant in the market thanks to our wonderful PAP and its MOM for keeping eyes closed on this problem.

In fact I believe PAP is implicitly supportive of such labour practices so as to keep business costs down in Singapore.

In other words PAP refuses to keep business costs down by holding down government taxes and levies and not raising of prices of HDB flat prices, electricity (being 70% powered by gas), water etc.

Instead PAP wants to keep business costs down by making Singaporeans SUBSIDIZE the industry through unpaid overtime and suppressed wages caused by the flood of foreign labour.

If PAP has any sense, let alone concern for the people, such industry subsidizing will do the economy in eventually because you are then encouraging the proliferation of inefficient businesses that can only survive through such subsidies.

[Before the early 90's Japan indulged in industry subsidies but through massive easy loans to inefficient traditional industries. It resulted in a recession that lasted more than a decade.]

In any case, I suggest that if you want to get going, you try out the job but without a contract to hold you down for any period of time. The idea is to mix around the industry because only then can you find other opportunities more easily.

After a while, if you find that you are being grossly cheated such as for working long hours and not paid overtime, move when opportunity arises. Don't stick there.

This will teach employers to treat workers properly.

On the other hand you may choose to refuse the job offer. I heard from one job recruitment agency that the running rate for Poly grad is now around $1500-$1600. I suggest you call up some recruitment agencies for advice on this and also for job lookout.

PAP is not looking after the people as far as this worker exploitation and depression of wages due to foreign labour is concerned.

Singaporeans have to act more individualistically by asserting their rights to employers and MOM for a minimum wage needed for basic survival. This by such action as I suggest above.

Those who get cheated for overtime worked should also report to MOM which claims it will keep complainants confidential from the employer. But if your workplace only has a few colleagues, the boss will more easily nail down the complainant. This would be a problem.

But without a fight the career prospects of young Singaporeans is being compromised by such labour issues.

Anonymous said...

Just heard the good news, the government is helping us again by raising ERP charges. Now we can travel without any traffic jams and according to the shiity times this will help the economy. Wow! It did not mentioned anything about the revenue this will generate for the governement and thus GDP. I hope the governemnt helps us again by raising the petrol tax, property tax as well. We need the economy to grow so that the Ministers slalry can be increased and the 66.6% can be so glad for their choice.

Singapore.Boy said...

This is definitely a over simplification of inflation but this is how it works in my little twisted mind.

The printing presses keep print money and people keep spending money. As more money enters the market, the less it is worth. It is a supply and demand thing. This IMHO is inflation. Very stupid hor.

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