Tags: Gayed | Hicks | oil | disinflation

Pension Partners' Gayed: Falling Oil Prices May Portend Deflation

By    |   Friday, 10 October 2014 11:35 AM

Most people view falling oil prices as good news, believing lower gas prices will help boost stocks and the overall economy.

Michael Gayed, chief investment strategist at Pension Partners, doesn't think that's the case, however.

Falling oil prices reveal the risk of deflation, regardless of central bank actions, he warns.

"Some will argue falling oil is bullish. This is too simplistic a way of thinking," Gayed writes in a column for MarketWatch

"The reason for price movement matters more than what the price actually is. With small caps so weak, the dollar so strong, consumer stocks not performing well and yields low, the message of the market is disinflation and real deflation risks."

If the reason for lower oil prices is falling demand and disinflation, then we should worry about how fast prices are falling. And prices have been falling fast, he says, calling the reversal in oil prices and energy stocks "stunning."

"Perhaps what's to come will be the market beginning to worry about oil's movement after all."

While deflation is can certainly pose dire economic consequences, falling oil prices do not create deflation — nor do they create inflation, writes Ball State University economics professor Michael Hicks in his weekly commentary.

"The drop in oil prices, which trickles down to most commodities, is not deflation, just lower costs for producing goods," he notes.

Deflation is not the same as falling prices, which are prompted by better machinery, better-educated workers or more abundant raw materials, explains Hicks, director of the Center for Business and Economic Research at Ball State University.

While inflation is caused by too much money in circulation, deflation is caused by too little. Consumers and businesses have too little money to chase too many goods, prices decline and consumers and businesses delay purchases. Recession, and possibly an economic depression, follows.

"It is probable that deflation, not the stock market crash, is the real cause of the Great Depression," Hicks says.

While falling energy prices don't portent deflation in the U.S., Europe is indeed on the brink of real deflation, and not just in the eurozone's troubled nations but also in stronger areas like Germany, Britain and Scandinavia, he adds.

"Slowing economic growth places downward pressure on prices and in a rush to prevent deflation, the European Central Bank will aggressively boost money supplies in the coming months."

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Most people view falling oil prices as good news, believing lower gas prices will help boost stocks and the overall economy.
Gayed, Hicks, oil, disinflation
Friday, 10 October 2014 11:35 AM
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