Search This Blog

Wednesday, December 16, 2015

The Commodity Deflation

The Federal Reserve is likely to raise interest rates today.  If that is a surprise to you, then you never pay attention to economic news.  There's some other news, however, that is much more important.  The prices of most commodities are much lower than they have been in a long time.  Oil is at lows not seen since the depths of the recession.  Natural gas is also a multi-year lows.  But it's not just energy.  Extreme lows have been reached in prices for copper, iron ore, gold, silver, coal, platinum, other metals and many agricultural products as well.  Since some of these commodities are produced outside the USA for the most part, the price decline is partially due to the strengthening of the dollar, but the price changes are much larger than that.  What has happened is a worldwide decline in commodity prices.

There are both good and bad effects from this price drop for commodities.  Countries that depend to a great extent on production of natural resources are being hurt in a major way.  Third world nations are getting slammed as the value of their exports has fallen dramatically.  Workers in the industries that produce these products are seeing their jobs disappearing as production gets cut back.  Even in the developed world, the effect has been pronounced.  Canada is in recession mainly because all of its natural resource industries have been hit so hard by the price declines.  These price declines also threaten the ability of industries and even countries to pay back their debts, most of which are owed to institutions in the USA, Europe, Japan or China.  If there are bankruptcies and defaults, the effects will be quickly transferred to the lenders.  On the good side, prices for those who use these commodities have fallen quickly.  That means that profits have risen for the short term as costs have fallen.  In the longer term, however, the question is just how much of the world demand for finished goods will vanish as those who work in the production of these commodities lose their jobs. 

The world is on very dangerous ground right now.  It is a problem that deserves a lot more attention than a rate rise of a quarter of a point by the Fed.  The problem won't get the attention now from the media, however. 




 

No comments: