Input Inflation

As US housing prices continue to fall, setting off more mortgage defaults and foreclosures, crude oil prices are reaching record highs and the US dollar is tanking.

That much has been covered a lot. But you know, it really hasn’t impacted the economy too much until just recently, and hasn’t hurt the stock market…unless you were to argue that we would have enjoyed far more growth had we had lower inflation of energy inputs. This seems like a plausible explanation. I’d be more likely to believe it if I saw companies slashing their earnings forecasts more in the last few years, and not just after the subprime crisis part 2 that we just had.

Look at the charts for corn and crude oil:


Notice how crude oil jumped as soon as the Iraq invasion began? Prices spiked during Desert Storm and returned to previous levels. American war seems strongly linked to crude oil price increases. Why? Because it destabilizes the region?

But corn prices were stable until mid-2006, when it took off. What happened in mid-2006 to trigger food prices to start ramping along with a fresh rally in crude oil? Was it the “surge” being interpreted as an indeterminate extension of military incursion and a failure of American policy? Possibly.

China and India beginning to require far more energy? I doubt it — they’ve been developing extensively for much longer than just since 2006.

Was it the failure of the Doha round in July 2006 to settle on trade liberalization policies and food subsidies? I am not sure.

These are the sorts of questions I am seeking answers for in order to determine how things will get better in the future.

As a slight aside, I am beginning to think more about the timing of technological alternatives for combustion processes and gasoline shortages, along with the effects of global pollution. Will technology be able to step in in time before the world panics about water shortage, food shortage, energy shortage, or something else? If you want to see history in a sort of neo-classical way, technology will step in exactly when it should, when public demand pressure becomes so great that the incentive to find another path will create the solution… But I am not so sure it will be that pretty if we don’t understand the full extent to which we’re in danger…