You could use the gold argument in this scenario, but gold has acted with a mind of its own. During the period that gold rose above $1,000 and then ultimately to north of $1,200 per ounce, oil has remained range-bound in a price band of roughly $70 to $80 per barrel. Gold is also not widely used in the economy. Some can argue that gold is even irrelevant. What would deflation do for housing prices and rents?
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or deflation to truly come, we’d be looking at oil price far south of today. Is that $50 per barrel? Maybe. Why not $40 per barrel? The problem is that it is hard to find anyone who will confirm that oil is heading down toward $50 per barrel. The economics of oil drilling would likely prevent that because as oil prices get lower new production would be mothballed because of the economic loss.
Bond yields are extremely low. Mortgage rates are at all-time lows. The economic growth is coming at a slower pace than before. And on and on.
There is one risk out there that the deflation camp can use as their thesis. We recently argued about all the safety nets against a double-dip recession. That stance has not changed. If there is a true double-dip recession, the deflation will likely come into play. Another case would be serious population decline, which never seems to occur.
It was just a year ago that economists were predicting a period of hyperinflation ahead. The reason was simple enough. The government here (and governments elsewhere) were printing massive amounts of money to fend off a depression rather than just a recession. Simple enough. Throw in a trillion or more into the economy, and it would make sense that higher prices would follow.
Steel producers, aluminum producers, gold producers, oil producers and their counter-parts can all prevent deflation. If prices get too low, they just slow down the production. That cuts supply, which acts as a price buffer in the supply and demand models.
Japan is Japan. Their latest growth showed that in fact their was no growth. That country has never cleaned house after its last bubble about 20 years ago. Will China, Europe, India, and the United States make the same mistakes? That remains to be seen.
The U.S. will ultimately run into problems if the interest rates are kept at near-zero indefinitely. What an “extended period” means varies from source to source. Our own poll taken over the last month indicates that rate hikes in the U.S. are likely more than a year out.
Our guess, the theory of deflation can be talked about until the end of days and it will just remain theory. Deflation, at least in the U.S., seems to be more of an economic theory rather than an economic reality.
JON C. OGG
