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John "So Timber thinks that lower oil prices are inflationary"...

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timber1956

7,423 Posts.

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28/11/14

18:45

Post #: 14374736
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Originally posted by JID ↑

Hi Sydneyguy,

So Timber thinks that lower oil prices are inflationary (I guess because he thinks it will eventually spur economic activity) whilst you think that they will be deflationary. But you both think it will be bad for gold. Right?

This is the logic as I see it:

2008-9 GFC was a credit led recession. As per Reinhart and Rogoff history shows that these cause deflationary, deleveraging cycles - based on 800 years of research data and analogous to the 1930's (despite some small flaws in their data this is widely accepted).

Led by the FED, global Central Banks have been doing everything in their power to prevent this as it leads ultimately to sovereign debt defaults, which history shows cluster - if one goes, many go. It is now common knowledge that Central Banks act to support their respective Governments and are not independent [as shown via the relationship between BoJ and Government and quotes from Greenspan recently].

This collective QE has failed and has not been able to generate the moderate inflation that the Central Banks have been so keen to generate. Inflation is important because it allows sovereigns to quietly default on their massive debt loads without anyone noticing.

During a de-leveraging credit recession people/ organisations repair their balance sheets by paying down debt. Energy is a large part of household spending and thus it will create increased disposable income (as you point out due to deflationary impacts) even if nominal wages are flat or falling, and this leads to less nominal tax for the Government (not good for servicing your large debt load).

This increased disposable income will not, however, led to inflation as households will apply those funds to paying down debt - the de-leveraging has not even started yet within Western economies, quite the opposite due to the QE programmes. People will not be out buying the latest Samsung curved TV. This is also exacerbated by Western demographics whereby the aging population have past their peak-spending point and, as they approach retirement age are trying to repair their savings nest eggs from the GFC.

So, to my mind, lower oil prices and how it will lower costs for many parts of the economy (and thus CPI) will be deflationary and that is the last thing that Central Banks want as it will worsen various Government's debt servicing burdens and increase the eventual sovereign default risk profile of many nations.

This is the last thing that Japan wants. They are desperately striving for +2% inflation. What are they going to do now?

IMO, and aside from the financial crisis risk associated with junk bond defaults from high cost energy producers, this will push Central Banks further down the QE rabbit hole as inflationary expectations further role over - what are interest rates doing right now? Falling.

And this ... IMO, is one of the reasons why over the intermediate term gold will end it's bear market trend. A rising risk of sovereign debt defaults subsequent to a deflationary spiral and endless QE programmes.

Kyle Bass put it best;

"Buying gold is just buying a put against the idiocy of the political cycle. It's That Simple"

Cheers
John

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John

"So Timber thinks that lower oil prices are inflationary"

Where did I say that? That is your stupid idea, not mine!

I wrote that falling oil prices would increase incomes and profits in the economies of oil consumers (like Europe and America) because of falling costs. I did not say that this would generate inflation.

In isolation, the redistribution of wealth from producers to consumers inherent in falling oil prices should be inflation neutral.

Last edited by timber1956: 28/11/14
1 Upvote

0 Great analysis

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