What are you paying for a gallon of Premium?

Originally Posted by Spikuh

Deficit spending does not really have much to do with dollar vaulation (purchasing power, not exchange rate), but here are some numbers. It also has nothing to do with gas prices.

US federal deficits under the least 3 years of President Bush were:

FY 2007: $161 billion
FY 2008: $459 billion
FY 2009: $1,413 billion

For the 3 years under President Obama they have been:

FY 2010: $1,293 billion
FY 2011: $1,300 billion
FY 2012: $1,327 billion

As a percentage of GDP, our current deficits under both administrations have been considerably smaller than during WWII, about 10% as compared to ~25%.

US Federal Deficit by Year - Charts Analysis

When talking about dollar valuation (PP), you are refering to the CPI, not deficit/debt. For most of the relevant economic history, our country has pursued a policy of controlling and hitting an inflation target. The reason for this is because deflation is arguably more dangerous than inflation. A simple illustration is thinking which is more dangerous, having a shrinking money supply with a growing population (deflation) or a money supply that is growing at a slightly faster rate than population growth (inflation)? I should stress that this is a massively oversimplification of inflation/deflation. Both scenarios come with their own set of challenges to be solved.

The CPI index for 2007 through 2011 (2012 is not out for obvious reasons) is as follows:

FY 2007: 2.8%
FY 2008: 3.8%
FY 2009: -0.4%
FY 2010: 1.6%
FY 2011: 3.2%

These are the numbers that should (all other variables being constant) explain any increase to gas prices. We all know they do not. For example, 10 years ago, I could get a gallon of 93 octane Chevron for around $1.50. Today, that same gas should cost me $1.96 (~30% increase) assuming a constant 3% inflation rate. However, the actual cost is around $3.80 a gallon. That is a 253% increase. So obviously the CPI is not giving us the information we want.

Which brings us to the chart:



All the money pumping helped the economy avoid a liquidity trap and potiential deflationary scenario. That said, it depends on what our country does moving forward as to whether or not all that money is going to end causing massive inflation. However, drawing the conclusion that gas prices are going to triple in the future because of money supply is incorrect. It may be a contributing factor, but it is not THE factor we are looking for. Consider that in mid-2008, gas prices were around $4.00, then dropped back to under $2.00 by year end only to slowly climb back above $3.00 by 2010.


Gas prices top $3 a gallon - Dec. 23, 2010

Obviously, something is going on here besides money supply affects and the effects of our deficit and debt. Just what exactly, is harder to figure as we are talking about a global, finite resource that is increasingly harder to extract but at the end of the day all the factors get baked into the supply/demand curves and we get the price of gas that we have. Right or wrong, it is what it is, no single contributing factor is going to explain it all.

Are we going to see $10 gas? I have no doubt. Will it be within 3 years? Possible, but not neceassiry because of this chart or the deficit/debt. Even if we managed to shrink the money supply back to 2007 levels in a couple years, gas prices are still going to increase. They just are. We have not done the research or laid the ground work for a better solution. At the very least, we are 20 years behind on a transportation solution and 40 years behind on a power grid solution. That is going to cost us.