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Is there global deflation?
submited on 27.01.2009 in category Monetary policy | Macroeconomic developments
submited on 27.01.2009 in category Monetary policy | Macroeconomic developments
In the moment deflation is viewed as considerable risk before the recovery of economies from the crisis. Meanwhile, the explanations for the price declines are mainly based on the effects of contraction of economic activity and demand. The logical contradiction in the causal relationship is obvious. Nevertheless, the thesis is being established that there is a danger of deflationary spiral, which calls for government intervention.
In the moment there is an ongoing natural adaptation of market participants to changes in the markets of savings and credit. The credit contraction means reduced demand for investments assets (both of business and households). Thus, there is less need of commodities, materials, and energy, which are used for the production of such goods. The strongest decline in demand, and therefore prices is seen with energy resources and metals. This is the way for the market to show that as of the moment the reallocation of capital and resources toward other spheres is needed, as the most ineffective will close first.
The lower prices are bad to those, which based their expectations on long-term outlook of higher price levels and took on fixed liabilities. In other words, they have accumulated too much debt and if there is a drop in revenues even for a shorter period of time, they will not be able to cover their debt. In such times the prudent strategy is to use equity, which can serve as a buffer in the crisis (at least for a given period of time).
Bu the broader issue id that we are as of the moment in a period of global deflation. The decline of some commodities’ prices in the recent months (oil, metals, housing, and stock) created the illusion that prices are “too low”. If we assume that both entrepreneurs with long-term view and households have horizon beyond the current year, inflation must actually be the prevailing fear.
In the moment there is an ongoing natural adaptation of market participants to changes in the markets of savings and credit. The credit contraction means reduced demand for investments assets (both of business and households). Thus, there is less need of commodities, materials, and energy, which are used for the production of such goods. The strongest decline in demand, and therefore prices is seen with energy resources and metals. This is the way for the market to show that as of the moment the reallocation of capital and resources toward other spheres is needed, as the most ineffective will close first.
The lower prices are bad to those, which based their expectations on long-term outlook of higher price levels and took on fixed liabilities. In other words, they have accumulated too much debt and if there is a drop in revenues even for a shorter period of time, they will not be able to cover their debt. In such times the prudent strategy is to use equity, which can serve as a buffer in the crisis (at least for a given period of time).
Bu the broader issue id that we are as of the moment in a period of global deflation. The decline of some commodities’ prices in the recent months (oil, metals, housing, and stock) created the illusion that prices are “too low”. If we assume that both entrepreneurs with long-term view and households have horizon beyond the current year, inflation must actually be the prevailing fear.
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