Heads up, we are in for an economic storm

[canadian gardener]

Whenever gasoline prices rise, food and other transported goods rise along with.

Which drives up cost of living. Utilities charge more, and there are round after round of price increases and an inflationary cycle takes hold.

After inflation, deflation or a depression is often the only cure for the economy. Even though "planned" economies are the goal of government, government has less control of economics than they like to think.

John Maynard Keynes started the whole raise taxes and increase spending by government as a way to slow an economy or speed it up, but over the years his theories don't work quite as he predicted. Markets correct themselves in funny ways that hurt little people and backfire on the governments that try to interfere.

Events that create shortages in commodities drive up the price (supply and demand). Prices are merely indicators of relative worth.

What about price freezing? Would that help?

Price freezes won't work. They actually drive up real prices as reflected in the black market (the non government controlled economy)

Price freezes don't actually do what they are supposed to. They are an artificial "worth" while the real worth is far more. So the owners of the frozen commodity (rental units or oil barrels) must still meet increasing costs, while selling at prices that are quickly dropping below their costs. The commodity is taken off the market (and sold on the black market) while the frozen items are quickly grabbed as bargains. Shortages occur, and whenever something is in short supply, and when available is sold at an artificially cheap price, a black market is born.

Think about how something like meat is sold in Russia under communism which is a price fixed economy and you'll understand why they have a flourishing underground or black market system that evades the taxes to this day. Even though they are now a nominal democracy, once black markets take hold, they are almost impossible to integrate back into free market economies and bring back into a normal tax structure.

Why do depressions follow inflation?

Because what goes up must come down. It truly is a market correction. Think about real estate booms and busts. Too few houses drives the price up (supply and demand). Builders sniff profit on the wind and get into the market big time. It booms till SUPPLY is BIGGER THAN DEMAND.

When supply is larger than demand, prices begin to fall, faster and faster till the only builders left standing are the ones who didn't count on the good times rolling on, and who saved a good chunk of what they made to tide them over the bad times.

Now at this point there is TOO MUCH real estate and not enough buyers and it takes a few more years before the situation reverses. HOWEVER in areas where there are no jobs, no stable economy, a real estate market may never bounce up because there is always far more supply than there ever will be demand again. Sometimes another ghost town is born. The economy dies, and the townspeople move on at great personal cost, leaving houses behind, in search of a wage somewhere else, driving up demand in some other community.

Can you see how this is repeated from real estate, to gasoline?

One of the reasons gas prices remained so low, was that demand dropped in those awful late seventies, gas miser cars were designed and bought in huge numbers and big gas guzzlers were sold for pennies on the dollar. Demand for gasoline dropped and prices stabilized, but not till the whole supply demand cycle ran it's course.

In the meantime however it set the stage for rapid inflation of the late seventies, early eighties (high interest rates) and the depression of the mid to late eighties.

May I suggest that if you have a chance to lock in your mortgage at LOWER rates of today, you do so, and don't buy big. People who bought big were caught by the 18 to 25% interest rates of the early eighties and lost their houses.

May I also suggest that you consider getting and maintaining only the LOWEST GAS USING VEHICLES POSSIBLE? People who did that were much better off.

The latest stats I read were that about 40% of Canadians owned gas miser cars (we have higher prices here than you do, making gas misers more attractive) compared to 20% or so of Americans. The SUV market is still hot hot hot in the States.

I would suggest that if you have an SUV or a guzzler you sell it now while you can get your money out of it, and buy something in the line of a smaller gas miser.

(I'm preaching to the converted here I know, because most people in the village here have frugality running in their veins, and wouldn't have a gas guzzler in the first place) but it may be something for a new frugalite to contemplate.

hope that helps

[canadian gardener]

Oh and fill your pantries NOW before the big price increases start rolling in which I'm predicting will happen fairly soon, like within a month or two.

This is above and beyond the normal price hikes in the early and mid fall. Gasoline and diesel fuel costs are skyrocketing so food and anything trucked into your region will cost more, way more. Retailers love to tack on a little extra of their own in the middle of a price hike due to high gas costs for truckers too.

Here's how it works normally, just make sure to factor in more for the rise in gasoline.

Prices are normally jacked up around the end of summer. Retailers hope that when you pick up school supplies, you won't notice the increase in prices of toilet paper, coffee and flour.

The same thing happens around October when people start doing Christmas baking. The retailers hope you won't notice along with the pricy dried mixed fruit or spices or baking supplies that you are getting.

So 2 times a year, Late August and around mid to end of October prices rise anyway.

This year I'm thinking they will keep going up and by Christmas it should be peaking.

[Lucky Star]

Thanks, margery, for the posts - I'm planning on building up my stockpile during September... it may be a bit tight but what you said just gave me an extra incentive to do so. I definitely see prices on just about everything going up in the near future, and I want to be prepared.

[bee9984]

Yes, Thanks Margery. I already have planned to pick up some more extras this weekend etc. Gas prices here where I am in Quebec is already up to $1.47 a litre.....and it takes 4 litres to make an american gallon which would be a total of $5.88 a gallon if you convert our price per litre.....and just to think just only 2 weeks ago we were paying about .99 cents a litre and I thought that was crazy .

We will be making less trips to the city for sure.....more then likely we will cut back from about twice a month to once a month. Our vehicles are paid for but older, I talked to dh and we agreed that we will sell the mini van and pick up another small car.....I will need a small vehicle in case I have to go to the school for my children etc....just in case so dh doesn't have to leave work to go and get them.

Tomorrow we are calling to get our wood. My friend in Nova Scotia told me this evening that she doesn't know how she will afford to heat her house this winter....it is going to cost her $800 to fill up her oil tank and she said that will only last for about a month, and her hydro bill on top of that. My friend told me that alot of her friends are talking about closing off the upstairs of their homes for the winter and moving beds etc downstairs.

I am so thankful that I have been trying to be frugal for the past 3 years......before that I had never even heard of the word , but when we moved to quebec and I knew that I didn't have a job to go to I did a search on cheap but nutrious meals and found the word frugal........I thought what is that and clicked on the addys with this word in it and I have been hooked, lined and sinkered ever since

I am so thankful that we didn't buy a house for the maxium amount which we had qualified for when moving here....instead of a new 2 story fancy home , we opted for a nice 26 year old ranch bungalow for under $100,000 which was a really good price for here 3 years ago, and our interest rate was locked in at 4% for 5 years.....I am just worried that in 2 years when we go to renew that the interest rates will be like they were in the l980's so dh and I have decided to try to put as much as we can before renewing our mortgage in 2 years.

Heather

[dina]

It's fine to be prepared, just don't panic. If everyone goes out and buys as much as they can of anything right now, there will be shortages and of course prices will skyrocket. The most important thing right now is to remain calm.

[nodmicks]

I definately see this scenario happening. I tend to stock up in the fall anyway just simply because I detest the cold so very much and an extra trip out in below zero weather is very unappealing!!!
We had been keeping just 1K EF and putting all extra on debt. I think we are going to start splitting every extra dollar differently instead of paying just debt. I'd like to put a portion towards stockpile, debt and a bigger ef.

[AmyBoz]

Originally posted by dina
It's fine to be prepared, just don't panic. If everyone goes out and buys as much as they can of anything right now, there will be shortages and of course prices will skyrocket. The most important thing right now is to remain calm.

Exactly.

[SCDowney]

Margery, I realise that inflation is a fact of life. However, fuel is essential for many people, like milk, fruit, vegetables, insulin, etc. The Canadian government doesn't tax these items because of it, and in fact manufacturers of essential medical devices have a government imposed cap of how much they can charge.
So, why isn't there a cap on or better system for fuel prices?
And do you know if there is an address to protest the rising fuel prices to?
This seems like adding insult to injury to those who've been caught by Katrina.

[peanut]

bee9984: If the costs are really going to be that high, maybe Nova Scotians should be hotfooting it to Canadian Tire to convert to solar energy? They have solar panels there for $700cdn. I figured we'd need four to cover the energy requirements of our home. Just a thought. That would cost them the same as heating with oil for the winter!

Dh and I can't justify it. We heat with natural gas, which at it's worst is $250/mth. in January. I expect this winter prices will go up and we will be at $350 come January. Our neighbors are paying almost twice as much as us because they are not energy conscious. Also, the SK government subsidizes gas costs quite a bit. They may not be able to anymore, if a rate hike is too high.

So we'll be eating by candlelight, shutting doors to unused rooms, shutting off the basement, etc. this winter. Things we've only played with in the past, if tried at all. We're also looking at replacing the back door exterior light fixture, and some other lights in the house, so it can handle a compact flourescent bulb. And talking to the kids about finding alternative transportation, or planning more in advance before asking us to drive them places.

[Telephus44]

Thank-you Margery, for a clear and concise explantion of increase prices, inflations, and the basics of supply and demand. I personally find economics very interesting, and I have started to dabble in the stock market last year, so I find posts like this very enlightening.

and SCDowney - the reason that they can't (or shouldn't) cap fuel prices doesn't have to do with whether or not they're taxed - its for reasons of supply and demand. It similar to the situation two years ago in CA with the electricity when they de-regulated suppliers but not the distributors. Your local gas station buys there gas for $2.50 a gallon (I'm making up numbers here for the sake of argument). They sell it for $2.75 and make $.25 a profit of gallon. The government steps and says that they can't sell it for more than $2.75. What does your local gas station do next week when they buy gas for $3.00 a gallon and they can only sell it for $2.75? Yes, price caps may help consumers temporarily, but then they hurt gas stations, and then they close, and then - well, the whole thing just gets worse.

The other thing I want to congratulate Margery on is getting the role of the government and the economy right on - and much as we think the government can control the economy and inflation, they really can't. The markets will do what they will and will correct themselves. It always drives me crazy when people blame the president for a lousy economy or the president takes credit for a good economy - they have very little to do with it! There are some ways that they can influence it, but in the long term - its going to do what it wants to do, regardless.

[canadian gardener]

Yes I kind of think of the economy like an elephant on a rampage.

When it's tantrum has run it's course you might slow the animal down by an offering of it's favourite food. But if you are in the way of a male elephant in the middle of it's Must (crazy behaviour during mating season)

you better just get out of the way of the elephant. Stand in the way, and you will be trampled no matter how much you entice the animal otherwise. Get out of the way, let the animal run it's course. Knowing when is the trick that elephant handlers (and good economists) should know for survival.

Economies are like that. If they are near a correction point govt can do stuff and take credit for the change much as FDR did with his new deal. It looked like govt spending actually helped restart the economy but in actual fact the recovery was already beginning in it's swing back from the depression.

Taxation simply puts a drag on the economy, some is ok, too much and you risk creating little whirlpools of doom for some industry and even some areas of the country.

There is a really good book explaining that called The Clipper Ship Strategy by Richard Maybury that talks about how govt taxes create holes in the fabric of the economy and govt spending creates artificial mounds of prosperity in other areas.

In fact Richard Maybury's series of books are a wonderful clear short course on macro economics for anyone who is interested in the subject.

[SCDowney]

Sorry I wasn't clearer; I didn't have enough time to respond clearly yesterday.
I was thinking of the oil companies, not the gas stations, when I made that comment. And I was referring to the classification of goods, not taxation. For example, there is an increasing demand for glucometers, but we don't see increasing prices for them because they are deemed essential by the government. A glucometer that costs 85 in the States, costs 30 here because of this fiscal policy.
Companies have a set margin of profit to attain, which as consumers we can participate in if we buy preferred stock. That's one way to profit off of rising prices. But that is not an option for everyone. Market corrections happen for stocks and interest rates, but do they happen at the grocery store or gas pump? I don’t recall prices falling after the last fuel price hike.
Fuel is flown in to some remote communities, and some are already paying almost $15 for a gallon of milk. Essentials and luxuries are trucked and flown long distances; the cost of that is added to consumer goods.
In the far north, solar panels are not as effective. Our shortest day leaves us with about two hours of sunlight, but some areas have none. Not everyone can afford alternative heating methods, and the price of fuel affects all other costs, that is why I view heating oil as an essential.
I wonder how much of the fuel price increase is due to propaganda and/or trade legislation. Does anybody know about this? Is our own crude oil cheaper? Are we held ‘over a barrel’ by trade legislation?
Basically, I just hate paying higher prices for anything; it flies in the face of my frugal nature!

[canadian gardener]

I hear you Sheila, my dad and step mum live in the Yukon, between Whitehorse and Lake La Barge and dad is very worried about the rising cost of gas there, and also supply.

Yes there are some things deemed essentials by our Canadian govt, but the USA they aren't and are subject to tax etc. Food and certain medical supplies are given a tax break.

Fuel isn't. Most of why we pay more at the pump than Americans do, is actually federal and provincial tax (although the Yukon being a territory, probably just pays way more simply for the costs of getting it there).

When I lived in the Yukon as a girl, everything cost WAY more due to having to have it trucked in or flown in. I can remember not eating "fresh" veggies, only in cans ditto fruit, and the local dairy when I was a girl wasn't cows, they reconstituted milk powder and sold it in cartons at the store. My parents were frugal and preferred to reconstitute their own milk powder at home in a wonderful dark green melamine jug.

Market corrections do happen with fuel and food, but the cost of living rises so what you see is a stable price for a period of time, versus rapidly rising prices. After the gas prices rose in the late 70's (I was in my 20's) they stabilized, but the price rise drove inflation for a few years. Once the dust settled, the market corrected for inflation by deflation in real estate, as the high interest rates of the early eighties (inflation at work) drove people out of their homes.

There were record losses in the banking industry at the time as banks foreclosed on properties or people simply handed the keys over.

That was the deflation or recession of the early eighties. Since then prices have risen slowly (I know it doesn't seem like it, but slow is relative) and the market economy has recovered to an extent.

One of the problems during the early seventies was an oversupply of paper money. The Vietnam war costs were still there, long after the Vietnam war was over.

Government was printing too much-- one way they can pay their bills before the dollar is devalued in circulation (inflation) and the result was that things cost more and more and more and there was a really rapid rise. All it took for disaster was the oil crisis to set it off. (and we in North America actually averted a worse correction )

hope that helps a bit.

[canadian gardener]

our crude is cheaper but again it's more expensive to pull it out of the tar sands and oil fields of Alberta than out of Iraq, and the rest of the middle east oil patch.

Haliburton which is the American oil firm is making record profits right now. They set the price by what they see fit.

Canadian oil producers must price at the same price or this is what happens

we keep our price low

Haliburton buys it all and sells it at their price

end result? we lose twice, first by selling at a bargain basement price and second we still buy at the high price/

and who wins? Haliburton again.

That is why we can't just say Canadian oil stays at a low price when the big fish in the pond are setting bigger prices.

[canadian gardener]

Last of your excellent points, living in the Yukon or any remote northern area is more expensive in a lot of ways. In the past there have been compensations such as the Northern allowance in the taxes so that people would be compensated for the extra amounts they pay for food and fuel etc.

In future Canada has got to keep it's commitment to the people of the North and far flung areas or else most people will be unable to stay there, and we will lose our soveriegnity over the northern less populated regions. It's already a problem in the Arctic waters, where several governments have been operating without our knowledge or permission and ignoring our sea perimeter.