Will Oil Exacerbate Other Deflationary Pressures? The fall in oil prices is creating havoc in Russia and oil production in other parts of the world. Petrodollars are becoming increasingly scarce and Arab oil nations are restraining their flow of influence money to the fundamentalist regimes they have supported. But is the downward pressure on prices just restricted to oil? The quick answer is no. The price of oil, metals, foodstuffs, grains, and other commodities have risen sharply beginning over a decade ago. However, typically, commodity booms come to an end as global economic growth slows, as is the case in recent years Indeed, the overall commodity price index for 2014 has fallen by almost 18 percent, with large drops in indices unrelated to oil. The trend is largely down. The Fed has for the last several years had a hard time reaching its inflation target of 2 percent. It has failed to hit 2 percent for 28 consecutive months. With Russia wobbling from sanctions and the oil price drop, with the Eurozone about to have a triple dip recession, with Germany just barely hanging on, and with Chinas growth estimates being cut back sharply from just under 7 percent to just under 5 percent., we are approaching a danger zone, where we have quickly slowing global growth, cheaper commodities and falling real wages. Deflation looms. Therefore oil is likely to be the precursor of a broader deflation in the world economy. Many produces can have price drops while maintaining profits just from the decline in oil prices. Deflation is a strong leading indicator of recession and depression, unfortunately, which is why the Fed is so worried and concerned but not candidly saying so. Here is why it worries. An inflation rate approaching zero or lower is bad for the economy because of its impact on the behavior of businesses and consumers. Companies are unable to maintain their sales and prices. This hurts profits, and companies usually compensate by cutting wages and firing workers instead. Consumers anticipating falling prices also tend to postpone discretionary purchases thinking they can buy more cheaply later. This can combine to create a vicious circle of less spending and further downward pressure on prices. It is a deflationary cycle and it can accelerate if it gets out of hand. That is why the Fed is worrying so. What should be the agenda for MMT if deflation seriously begins to get started as there is now a raised probability it will.
Posted on: Fri, 19 Dec 2014 05:14:21 +0000
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