Thursday, March 12, 2015

Market Watch Misses the Mark

I was reading Market Watch where Cody Willard made a short-sighted statement.

He said,

"Oil's collapse has been a function of cyclical oversupply after a long boom/bubble period, and that such a drop in energy prices is decidedly not deflationary."

Perhaps oil's decline is more about supply and demand than deflation.  That is possible.  However, energy prices underlay every sector in the greater economy.  The effects of such a drop in oil prices will be deflationary because prices in all industrial sectors will become lower.  The reduction in asset values for oil companies who had to list non-produced oil at $95 a barrel due to SEC rules will lead to deflation on some small scale.

On the face of it, his statement is correct, but ignores the larger picture.

An additional interesting conclusion from his statement indicates that the Kondratiev and Kuznets long economic cycles are alive and well.  A lack of demand is a classic symptom of Kondratiev winter.

I think the lower oil prices will create temporary deflation.  I don't think we'll get a destructive spiral.