For the last few years, the Federal Reserve has been trying to get inflation in the USA up to 2%. In other words, the Fed has been pushing for prices to keep going up each year. Sadly, for America, that is a policy that makes sense. Higher prices for the same goods, after all, is just another way of saying a lower value for the dollar. Think of it this way: the federal government owes roughly 18 trillion dollars in direct debt. If the values of the dollar goes down each year by 2%, then over the next decade, the real value of the national debt goes down by close to 4 trillion dollars. Inflation may be the only way that the United States will ever be able to pay back its debts.
Many other countries around the world face the same issue. These countries have massive debts and have been hoping that rising prices would lessen the burden over time. Greece is probably the most prominent example of these countries at the moment, but there are governments all around the world hoping for inflation.
At the moment, the world is moving towards deflation. In other words, prices are going down. Oil prices are roughly one-third of what they used to be. The last year alone has seen a 50% decline in oil prices. Gold and precious metals are also way down. Iron ore, coal, copper and other industrial commodities have fallen in price. The same is true for most of the agricultural commodities. Wheat is down over 15% year over year. Corn is similar. Then there's labor. Wages are also stagnant; they haven't been falling, but they haven't been rising either. In fact, the only thing for which prices have been rising steadily for quite some time has been the stock market. The price paid for securities has risen since the financial crisis in 2008 and 2009. It looks like that too may be ending.
So what does it mean that prices are falling? The simple answer is not a good one. Deflation is a major economic problem. People or nations with debt find it harder to pay back those debts. That means more bankruptcies and business failures. If deflation becomes the expectation for the public, then consumer spending will decline as folks wait for the price declines before buying major purchases. Slower economic activity results and that means less demand and lower prices. Of course, nothing works that simply in reality, but the general trend is there. If countries around the world find themselves unable to service their debts, things could get a lot worse very quickly. We could be facing a world wide debt debacle.
Let's hope not.
Many other countries around the world face the same issue. These countries have massive debts and have been hoping that rising prices would lessen the burden over time. Greece is probably the most prominent example of these countries at the moment, but there are governments all around the world hoping for inflation.
At the moment, the world is moving towards deflation. In other words, prices are going down. Oil prices are roughly one-third of what they used to be. The last year alone has seen a 50% decline in oil prices. Gold and precious metals are also way down. Iron ore, coal, copper and other industrial commodities have fallen in price. The same is true for most of the agricultural commodities. Wheat is down over 15% year over year. Corn is similar. Then there's labor. Wages are also stagnant; they haven't been falling, but they haven't been rising either. In fact, the only thing for which prices have been rising steadily for quite some time has been the stock market. The price paid for securities has risen since the financial crisis in 2008 and 2009. It looks like that too may be ending.
So what does it mean that prices are falling? The simple answer is not a good one. Deflation is a major economic problem. People or nations with debt find it harder to pay back those debts. That means more bankruptcies and business failures. If deflation becomes the expectation for the public, then consumer spending will decline as folks wait for the price declines before buying major purchases. Slower economic activity results and that means less demand and lower prices. Of course, nothing works that simply in reality, but the general trend is there. If countries around the world find themselves unable to service their debts, things could get a lot worse very quickly. We could be facing a world wide debt debacle.
Let's hope not.
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