The following editorial was published in Price Perceptions issue #1515A on October 11, 2014

Fear Now... Pessimism Later!

Following the 2008 financial collapse, central bankers worldwide pumped unprecedented liquidity into their economies. The Federal Reserve pushed interest rates to near zero and purchased billions of dollars in bonds and mortgages to “jump start” the US economy. In recent months, it has become evident central banks have just about done all they can do to offset damage from the collapse. Most creditworthy corporations, institutional borrowers and households have refinanced their debt at historically low interest rates and are waiting for the “boom times” to begin. However, the global economy appears to have been so severely wounded it is unable to get back on its feet.

Governments in Syria, Libya and Yemen have collapsed and those nations are in chaos. Iraq is fighting for survival, Russia has invaded Ukraine and the EU is headed for a serious recession. China, once the shining beacon of global economic expansion is slowing, Venezuela and Argentina are in deep financial trouble and Brazil appears headed for recession. Because we now live in a global economy, is it any wonder corporations and small businesses are unwilling to go out on a limb and borrow heavily to build factories or expand business as they have in the past?

Economists have warned in recent years if central banks continue expanding money supply at unprecedented rates, the eventual result will be rampant inflation. Many thought inflation would have already taken hold considering the magnitude of money printing that has taken place. However, gold is testing a four year low, crude oil prices have collapsed from summer highs and grain markets are trading at levels last seen in 2010. What’s going on? Why are commodity markets failing just as the US economy appears to be on the mend?

Fear! Corporations currently have more money on hand than at any time in history. Instead of borrowing to buy new equipment and build new plants, they are buying back their stock or investing in another business. They fear expansion as too many nations are in chaos and are suffering a slowing economy. Why take the chance to build a new factory when the world no longer promises ever expanding economies? Consumers are not borrowing and spending as they did in the 2000’s. They were hurt by layoffs and huge debts and do not want to be as vulnerable as they once were. The public has become distrustful of their government, distrustful of Wall Street and is increasingly concerned with prospects for another war. They are also fearful of the Ebola epidemic and are reportedly canceling cruises and beginning to avoid plane travel.

Public optimism appears to be waning and fear for the future seems to be growing. This may result in a general sense of pessimism, leading to a slowing of demand and price deflation in most commodity markets.

Bill Gary
CIS, Inc.


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