Low oil prices, or deflation generally, explained with the age of the capital.
(The time from investment to finished consumer goods)
All investment comes from savings, that is the consumer consumes less than the producer produces, (and the consumer and the producer is really the same person).
We have short time investments, like the chairs in the hairdressers saloon, or the food in the restaurant, or the wares in a sport shop. The investment returns in a short time.
Then we have the long time investments. The oil that we consume now, comes from platforms and wells that were made dozens of years ago. The same goes for hydro power and iron ore mines. The oil wells we invest in now, will give us oil to consume in twenty years.
In between are investments of varying time to consumable products.
The price signals govern what the capitalists invest in. For long time capital investments, it was oil and iron. What is invested now, likewise is governed by the price signals. Some think that electric cars, and self driving cars are the thing of the future, therefore the megafactory.
There is a balance between saving and the different categories of investments. If the consumers save more, in aggregate, than they used to, more capital is available, bidding down the interest (and bidding down current consumer prices). This signals to investors: forget short time investments, go long term!
Opposite, if consumers save less, they bid up current consumer goods and less capital is available. Both signals to the investor: Forget long term, invest in goods and services for the immediate future. And the balance is restored.
NOW, WHAT HAPPENED?
Central banks, not the savers, made money available, bidding down the interest rate. Since the financial crisis, but really, long before that, all the way back to the eighties.
This signalled to investors: Go long term! AND to the consumers: Consume now!
This is the reason for the epic imbalance in the capital structure. We have had bidding up of consumer goods and at the same time heavy investing in long term investments. Now, after these investments begin to materialize into consumer goods, we have exhausted consumers (lending), and a surplus of goods from long time investments (oil, iron, buildings, infrastructure). Too many oil wells, mines, railways, car factories hotels, offices and houses. (If you haven't seen surplus in all that, you will soon). Errors in deployment of scarce capital means lower productivity and lower standard of living for all. It is a world problem.
The problem will persist as long as the interest rate is manipulated by central banks, and years after.
(The time from investment to finished consumer goods)
All investment comes from savings, that is the consumer consumes less than the producer produces, (and the consumer and the producer is really the same person).
We have short time investments, like the chairs in the hairdressers saloon, or the food in the restaurant, or the wares in a sport shop. The investment returns in a short time.
Then we have the long time investments. The oil that we consume now, comes from platforms and wells that were made dozens of years ago. The same goes for hydro power and iron ore mines. The oil wells we invest in now, will give us oil to consume in twenty years.
In between are investments of varying time to consumable products.
The price signals govern what the capitalists invest in. For long time capital investments, it was oil and iron. What is invested now, likewise is governed by the price signals. Some think that electric cars, and self driving cars are the thing of the future, therefore the megafactory.
There is a balance between saving and the different categories of investments. If the consumers save more, in aggregate, than they used to, more capital is available, bidding down the interest (and bidding down current consumer prices). This signals to investors: forget short time investments, go long term!
Opposite, if consumers save less, they bid up current consumer goods and less capital is available. Both signals to the investor: Forget long term, invest in goods and services for the immediate future. And the balance is restored.
NOW, WHAT HAPPENED?
Central banks, not the savers, made money available, bidding down the interest rate. Since the financial crisis, but really, long before that, all the way back to the eighties.
This signalled to investors: Go long term! AND to the consumers: Consume now!
This is the reason for the epic imbalance in the capital structure. We have had bidding up of consumer goods and at the same time heavy investing in long term investments. Now, after these investments begin to materialize into consumer goods, we have exhausted consumers (lending), and a surplus of goods from long time investments (oil, iron, buildings, infrastructure). Too many oil wells, mines, railways, car factories hotels, offices and houses. (If you haven't seen surplus in all that, you will soon). Errors in deployment of scarce capital means lower productivity and lower standard of living for all. It is a world problem.
The problem will persist as long as the interest rate is manipulated by central banks, and years after.
Good stuff and makes our current predicament very clear.
But to what end?
Stand With Rand? Go Galt?
Short everything but the almighty dollar?
Move to Goa and dance on the beach?
