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March 28, 2008
Oil, Inflation, and the economy

I've been watching the inflation numbers closely and remembering a hypothesis I've come to adopt. It seems to me that in the past when the Fed was trying to "fight inflation" all they were really doing was chasing the cost of oil. As the modern economy has moved to use less oil per $1 of GDP one would expect that we'd hit a point where oil costs wouldn't have the same effect on the economy as they have in the past. In the current economic situation I've been surprised at how much negative activity is actually happening in the first quarter because I can state pretty emphatically that the economy isn't slowing in Silicon Valley. As such, I was starting to worry that we were for the first time inflating the currency denominated price of oil only and thus driving oil prices up artificially as a monetary phenomenon. With that question in mind I asked the interwebs and found an excellent series of charts. This one shows that the oil price is likely more a commodity bubble and not strictly a currency phenomenon as these other countries are not adopting such inflationary policies:

My quick googling also doesn't show a direct correlation between oil and gold - which further lends some credence to this being more of a bubble and not currencies coming unglued from underlying value. Also note that I find the "peak oil" thesis relatively specious. One can see some inflation in the dollar in these charts but that smaller amount is not surprising even if it is annoying.

Always nice to take a moment for the first principals sanity check. Now to figure out where to short oil prices...

Posted by hoffmang | March 28, 2008 12:19 AM

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