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Los Angeles, California, United States
The blog 'Breaking Bread' is for a civil general discussion, like you might have at the dinner table with guests. The posts 'Economics Without the B.S.' are intended for a general audience that wouldn't have to know the difference between a Phillips Curve, a Laffer Curve, or a Cole Hamels Curve. Vic Volpe was formally educated at Penn State and the University of Scranton, with major studies in History, Economics and Finance, and Business; and, is self-educated since by way of books and on-line university courses. His practical education came from sixty years of work experience in the blue-collar trades as well as a white-collar professional career -- a white-collar professional career in production and R&D. In his professional career and as a long-haul trucker, he has traveled throughout the lower forty-eight. From his professional career alone he has visited many manufacturing plants in the United States, Europe and China. He has lived in major metropolitan areas and very small towns in various parts of the United States. He served three years with the U.S. Army as an enlisted man, much of that time in Germany.

Wednesday, April 22, 2020

Will a plunge in commodity prices sink the economy into a downward deflationary spiral to another world-wide depression?

Will a plunge in commodity prices sink the economy into a downward deflationary spiral to another world-wide depression?



Economics Without The B.S.**: 

[**  Double entendre intended.]

Not just oil prices, but the broad commodity index is down about 25% right now.

Can commodity prices affect the overall economy?  In the inflationary cycle of the 1970s, the escalating commodity prices contributed to the inflation of the 1970s.  Can collapsing commodity prices in 2020 set off a deflationary cycle in the overall economy, plunging us into a depression instead of just a serious recession?

Couple the collapsing commodity prices with the disruptions in the international and national distribution systems.  Add in the effect of lower incomes by individuals -- worldwide.  How much can fiscal stimulus by federal governments blunt the deflationary fall?


And on top of all this, don't forget, this past September, before anything about the coronavirus, we had weakness in both the international as well as our own financial markets with the banking system providing liquidity; and, the Fed had to intervene in the markets back then to provide the needed liquidity.

Milton Friedman said these are monetary phenomenon; is he correct? I don't think so -- monetary policies may get us out of the economic mess caused by these events, but monetary phenomenon didn't get us into this mess.  Did monetary phenomenon set off over-production in the oil market?  What about external events (a pandemic) affecting the broad international economy?

So, what does the future hold?  What is the role of the Fed? [Can you make people invest who do not want to invest?]  And is the Trump Administration up for a new crisis?...or a Biden Administration if that should result?  Can you make people invest who do not want to invest?; what did FDR do when faced with that possibility in 1933?  How do you stop (or put a bottom to) a downward, plunging deflationary spiral?

Like the 1930s, there is a possibility we will have a test of beliefs in economic theories when the market mechanisms fail to function for the benefit of a broad democratic society, this time with international consequences.  Not just a test of economic theories, but a test for democratic governance with the will of the people, and on an international level.
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