Ashraf Laidi: Dangers of underestimating deflation

[bemildred]

Deflation = Low wages + negative interest rates

Deflation will be the dominating theme of 2015. Deflation occurs when prices of production factors (wages and interest rates) fall to the extent of limiting labour and capital from drawing higher prices. The culprit to these conditions is typically an excess supply of labour and capital to the extent that wages and interest rates weaken substantially until they draw sufficient demand to the point of stabilising their price.

But as demand for labour and capital fails to fill the supply of workers and available liquidity, the spiral of excess supply takes over wages and interest rates remain weak, and even negative. Deflation hurts borrowers relative to lenders. Countries whose central banks combat deflation, or conduct reflationary policies, should see their currencies depreciate. As low inflation extends to disinflation and creeps into deflation territory in Europe and China, the US runs the risk of importing deflation via the strengthening dollar. If this occurs, the Fed will be forced to postpone its first rate hike, now expected by bond traders to occur as early as Q2 2015.

http://www.cityindex.co.uk/market-analysis/market-predictions-2015/35895762014/ashraf-laidi-dangers-of-underestimating-inflation/

[bemildred]

1. Wolf Richter: First Oil, Now US Natural Gas Plunges, “Negative Igniter” for New Debt Crisis

Yves here. Wolf has been keeping a sharp eye out on how shale gas players were junk bond junkies, and how that is going to lead to a painful withdrawal. Here, he focuses on one of the big drivers of the heavy borrowings: the deep involvement of private equity firms, who make money whether or not the companies they invest in do well, by virtue of all the fees they extract. The precipitous drop in natural gas prices is exposing how bad the downside of a dubious can be, at least for the chump fund investors.

It’s hard to imagine an industry that is a worse candidate for private equity than oil and gas exploration and production. The prototypical private equity purchase is a mature company with steady cash flow. Oil and gas development is capital intensive and the cash flows are unpredictable and volatile, because the commodity prices are unpredictable and volatile.

A less obvious issue is that it actually takes a lot of expertise to run these businesses. This is not like buying a retailer or a metal-bender. Now private equity kingpins flatter themselves into believing that experts are just people they hire, but here, the level of expertise required, and the fact that the majors are way bigger than private equity firms means that the private equity buyers don’t know enough to vet whether the guy they hire is really as good as he says he is. Like all outsiders, they are way too likely to be swayed by the sales pitch and personality rather than competence.* And even with all the money that private equity has thrown at energy plays, it’s not clear that New York commands much respect in Houston.

http://www.nakedcapitalism.com/2014/12/first-oil-now-us-natural-gas-plunges-negative-igniter-for-new-debt-crisis.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

[PeoViejo]

2. Sure, an economy that depends on Inflation to create Wealth is bound to be in trouble

,,when something will cost less Tomorrow, than it does Today. People might just start buying stuff when they need it instead of hoarding in anticipation of increased prices.

[bemildred]

3. And the price of oil affects lots of other things.

And we are already having problems with not enough "growth".