Oil
Prices 2015: Why Economists Fear 'Nightmare' Deflation
When
the U.S. Federal Reserve holds its next policy meeting at the end of
the month, experts say the central bank should consider the
consequences of deflation when making policy decisions.
Minneapolis
Fed President Narayana Kocherlakota and other economists wrote in a
recent paper that there’s an increasing possibility that deflation
could creep into the U.S. economy. As oil prices tumble to lows not
seen since the Great Recession, Kocherlakota and the paper’s other
authors aren’t alone in the view that global markets are on the
cusp of a fearsome disorder: Falling prices on a wide array of goods
and services, a syndrome known as deflation.
Investors
are worried about deflation, too, as evidenced in this week's
volatile financial markets, as the Dow Jones Industrial Average
tumbled as much as 239 points Tuesday after dropping 350 points in
afternoon trading Monday.
For
most consumers, it doesn’t make intuitive sense that economists
should fret sliding prices, but deflation can lead to a stagnating
economy. The simple explanation: In a deflationary environment,
consumers resist making large purchases of just about everything in
anticipation that prices will continue dropping and lead to better
deals are ahead. The result is a broad slowdown of economic activity.
Further, deflation makes it more difficult to pay off debt, something
American consumers and many U.S. employers have a great deal of.
“Deflation
is a nightmare and it’s difficult to cure,” Peter Cardillo, chief
market economist at Rockwell Global Capital, says.
Deflation,
not to be confused with disinflation, or a slowing rate of inflation,
is dangerous because it reduces the supply of money and credit
coursing through the economy, and it can create less demand for
big-ticket items from cars to washing machines. At its worst,
dwindling demand can lead to global depression.
It’s
widely held that deflation contributed to the Great Depression’s
massive rise of unemployment. Japan suffered from deflation during
the mid-1990s, but the country still hasn’t been able to fully
recover despite its ongoing massive monetary stimulus programs. Now,
as Europe teeters on the brink of a triple-dip recession, the fear is
that declining oil prices could lead to deflation and spread
throughout the global economy.
Periods
of deflation lead to higher unemployment. “As the old saying goes,
if a loaf of bread goes from a dollar to a nickel, on the surface
that’s good news,” Cardillo said. “But if you don’t have [a
job to earn] that nickel and purchase that loaf of bread, that’s a
problem.”
Signs
of deflation are emerging more and more quickly. The European Union
said Wednesday that consumer prices fell last month for the first
time in more than five years. On Tuesday, U.S. crude oil dropped to
$47.93 a barrel, its lowest level since April 2009. So far, the oil
price slide has been good for oil-consuming countries such as the
U.S. As prices drop for commodities, gasoline prices and other prices
fall, putting money back into consumers’ pockets.
“The
global economy is really walking a fine line between outright
disinflation and deflation,” Karl Snyder, chief market strategist
at Garden State Securities, says. “It’s not that low oil prices
are bad, because low gasoline prices are good for the consumer,”
Snyder says. “It’s what oil prices may be signally, and what they
might be potentially signaling is lack of demand, leading to
deflation.”
There
is some evidence that the global economy is heading toward deflation,
says Snyder. Some investors and institutions have already begun
hedging against it by purchasing vast amounts of U.S. treasury bonds.
The yield on 10-Year U.S. Treasury note dropped below 2 percent
Tuesday, hitting the lowest level since May 2013, signaling deflation
fears are heightening investor demand for safe haven assets.
Meanwhile, the price of gold -- another asset often seen as a safe
haven -- jumped to a three-week high Tuesday. In a deflationary
environment, cash also becomes more attractive. It's not accident
that the U.S. dollar surged to an 11-year high last week against
other major currencies.
Rob
Kirby-Financial Meltdown and Confiscation of Your Money Coming in
2015
Rob
Kirby of KirbyAnalytics.com thinks what is happening with oil prices
being cut in half in a matter of months is no accident. Kirby
explains, “I look at what is transpiring in the crude oil market as
yet another engineered or financial trickery on the part of the
financial elites. . . . What this breakdown in the crude oil price is
going to spawn another financial crisis. It will be tied to the junk
debt that has been issued to finance the shale oil plays in North
America. It is reported to be in the area of half a trillion dollars’
worth of junk debt that is held largely on the books of large
financial institutions in the western world. When these bonds start
to fail, they will jeopardize the future of these financial
institutions. I do believe that will be the signal for the Fed to
come riding to the rescue with QE4. I also think QE4 is likely going
to be accompanied by bank bail-ins because we all know all western
world countries have adopted bail-in legislation in their most recent
budgets. The financial elites are engineering the excuse for their
next round of money printing . . . and they will be confiscating
money out of savings accounts and pension accounts. That’s what I
think is coming in the very near future.”
Join Greg Hunter of USAWatchdog.com as he goes One-on-One with gold and derivatives expert Rob Kirby.
Join Greg Hunter of USAWatchdog.com as he goes One-on-One with gold and derivatives expert Rob Kirby.
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