The Dollar is Deflating (A Little Bit)

Oil Falls All Week Long

Crude oil has taken a meteoric die this week, down well past $46 per barrel and hovering around $44. The reason that oil prices are so dangerous is that they’ve fallen past every support point. There isn’t an analyst on The Street that can say with any confidence when the price of oil is going to stop falling.

The reason why nobody on Wall Street can make a credible prediction is because it isn’t up to market forces. OPEC is the sole controller of price right now, and they’ve refused to slow down production in order to let the price of crude recover.

Unless the price of crude turns around, America can expect to see even more layoffs in the Energy Minerals sector, a sector which has already been hit hard.
If crude oil prices aren’t $20 higher by this time six months from now, you’re going to see the Dakota oil fields clearing out as workers get sent home in dribs and drabs.

Precious Metals Near Record Lows

It’s not just crude oil that is having a crisis right now, though. Precious metals have all fallen this week, and are near year-long lows. Everyone who yelled for years that the market is unstable and gold is the answer is currently taking a bath. The real tragedy of the situation is investors who were conned into putting their retirement into gold-backed securities.

Gold is only one example of precious metals that are taking a hit, though. The price of copper is near record lows for the year as well. That means good things for the manufacturing sector, who rely on hundreds of miles of copper wire and millions of copper components every year, but it’s hurting miners like Freeport-McMoRan (FCX).

The Dollar is Entering a Deflationary Period

In what could be a serious piece of good news for the average consumer, the dollar appears to be deflating slightly. If the trend continues -- and it likely will with the rest of the world in shambles -- you can expect to pay a little bit less for everything. Unfortunately deflation isn’t as perfect as it sounds. There are consequences to paying less for goods and services in the broader economy.

For instance, in a deflationary economy many people will put off major purchases as they watch prices fall. We’re all inherently bargain hunters, and when the dollar deflates the bargains are everywhere. But rather than being limited-time offers, prices just keep falling. That can make consumers wait and wait until they stop, because the only thing better than a bargain is a bigger bargain.

Deflation also takes a toll on wages, which is something we really can’t afford at this point. Wages are already stagnant, and it’s had an impact on consumer spending. Fortunately we seem to be breaking out of that trend, but it’s been a long time coming. And wages still haven’t grown as much as the economy would lead us to expect.

Fortunately for all of us, this seems to be a mild deflationary move based mostly on the financial troubles of other economies overseas. The dollar is worth more because the Euro -- and other currencies -- are worth less. That’s not a bad position to be in if you’re an importer, although companies who export their goods as a large chunk of their revenue are going to have a bad time.

This bout of deflation comes after years of mild inflation, as the government does all it can to keep the value of the dollar strong. In the end, this might not be a bad thing for consumers as long as the deflationary period is relatively short and mild. Everyone is already paying less at the pump, now you can expect to pay a little less everywhere else, too.
Published on Aug 8, 2015
By Aaron Phillips
Aaron Phillips is a financial researcher and journalist based out of Michigan. He regularly writes the IG Daily and IG Weekly columns.

Copyrighted 2020. Content published with author's permission.

Posted in ...