Deflationary Crisis is Imminent
Duncan Richardson, News Editor
15 Dec 2015, 12:34 p.m.
Prior to the 2008 stock market crash commodity prices plunged as deflationary pressures took hold over the economy. Worryingly, the same is happening right now.
On Thursday the Bloomberg Commodity Index closed at a 16 year low and is down 28% year to date. Mining giants such as Anglo American and Glencore are slashing their work force and cutting dividends to stop their share price collapsing.
The last time commodities were so cheap an economic implosion was just around the corner. 2015 has been a bloodbath for the commodity sector as supply increased and demand weakened. In recent days the oil prices fallen below $40 per barrel and base metals such as nickel, steel, aluminium and cooper have collapsed further.
It is clear we are entering a deflationary cycle and if the Fed does raise rates on Wednesday it will only accelerate deflation. Deflation occurs when the amount of credit in the economy decreases. This means there is less money in circulation and prices decline. This was the cause of the 2008 economic crisis and it appears history is repeating.
To stop the economy falling into a deflationary depression Central Bankers have to expand the money supply. Central Banks can either print money via QE or decrease interest rates to encourage consumers to take on further debt and thus expand the money supply.