No. of Recommendations: 0
To a degree you're right, malibusean01. Theoretically a fall in prices is a good thing because consumers will have more discretionary money to spend if they are being forced to spend less on things like gasoline and food. Many people have been touting this on CNBC and Bloomberg lately.

However here's my personal take on the current situation. The problem is that deflation is a symptom of a very ill economy. When things are this bad, consumer confidence plummets and the consumers who still have jobs tend to horde any money that they are saving as a result of lower prices, rather than spending it. A drop in consumer spending is a major problem in a country like the United States where it accounts for around 70% of the GDP.

Looking forward a year or possibly more, the low prices that we are seeing could, and in my opinion probably will, lead to massive inflation as the government slashes interest rates to zero and floods the country with money, devaluing the U.S. dollar.

Compounding the issue will be the fact that the low price of oil will stifle investment in anything but the lowest cost projects. Things that were adding to the global supply of oil at $100+, like oil sands and deepwater drilling are not economically viable at this level. Once the economy stabilizes theoretically the price of oil could shoot up even higher than it was earlier this year as a result of supply constraints.

Of course, no one knows for certain what the future will bring, but it's fascinating to try to make an educated guess about what will happen.

Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.