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Deflation and You

Stocks took the day off  Monday, in the U.S., in observance of Martin Luther King Jr. Day. So this is a safe time to bring up a subject that the markets might not support (in the short run, at least)  –deflation.

The crash in crude oil prices, along with other commodities like copper, has made that subject almost mainstream and has contributed to a bad start for stock prices in early 2015. Earlier this month the Los Angeles Times ran a long Sunday piece on fears of global deflation prompted by weakness in Japan and Europe and China’s slowing growth, which is a big factor in less demand for copper and oil.

None of this surprises Bill Helming, a Kansas-based economist and independent consultant well-known in the cattle industry. Even with some signs of recovery in the U.S. economy, Helming believes we are still in the bust phase of a 60- to 80-year business cycle.

“Deflation is absolutely coming,” Helming told during a long interview last week. 

What exactly is deflation? Simply put, it’s the opposite of inflation, as measured by the consumer price index. When deflation occurs, wages, commodities, assets all can fall in value.

“Deflation is a whole different animal from what basically everybody alive has experienced,” Helming said. Even surviving members of The Greatest Generation, now in their 90s, were just children from 1929 through 1939. The CPI fell on average by 2% a year then, during the Great Depression, or 20% over a decade. (As you can see in the graph below, from the Federal Reserve Bank of St. Louis, the really scary deflation after the stock market crash of 1929 started to end in 1933, only to go negative again in 1938.)


The European Union seemed to be tipping back into deflation in December. Japan has been in deflation for 22 years. Helming expects the U.S. economy, which he sees as still weak, to be dragged back into deflation by weakness in Europe, Japan, and China. Those three economies, along with the U.S., account for 75% of global gross domestic product, Helming says.

Crude oil prices, at a six-year low at the start of 2015, are a leading indicator economic indicator Helming watches. Here are others:

• The dollar. The index against major currencies is at 10-year highs.

• The yield on 10-year U.S. Treasury notes, at 1.71% early this year. Even in the Depression, it stayed above 2%.

• Wages. The median for individuals and families “in fact has declined in real terms 8% since 2008,” he said. 

The U.S. economic recovery has been weak, he said, growing an average of 1.2% annually from 2006 to 2014, worse than the 1.32% average of 1929-39.

Helming is one of the few economists who hasn’t been predicting a rise in interest rates on bank loans, something many have been incorrectly forecasting for several years, due to interest rates that were kept at historically low rates by the Federal Reserve’s efforts to stimulate the economy.

If you’ve refinanced debt at those historically low rates, it might not help as much as you expect if the economy goes into full-blown deflation. You would be paying off debt that, in effect, grows bigger as everything else declines in value. 

“Farmers need to be very cautious about their debt position, liquidity, and being able to make do with a lot less than they have,” Helming advises.

In 2010 Helming published a book, What Goes Up Eventually Comes Down, that predicted “a period of major price and asset deflation, resulting in a loss of over half of the American wealth…” sometime between 2012 and 2014.

Obviously, Helming wasn’t correct. But it could be that only his timing was off slightly.

Iowa State University economist Chad Hart agrees that “Bill has some right to be concerned here.” Hart concurs that if global deflation kicks in, ag commodities and U.S. exports of them will suffer. Under that scenario, “you’re watching your market get smaller,” he said.

Hart isn’t certain that’s likely. World demand for record U.S. corn and bean crops remains strong, he told The carry in corn futures (higher out-month prices) stretches to 2016. The U.S. economy seems to be strengthening. “I’m hopeful that our economy is going strong enough that we can help pull Europe back,” he said.

This week started with signs that Hart could be right. European shares hit a seven-year high as the European Central Bank prepares to start a bond-buying program to support the euro zone economy. That follows a good day in the U.S. stock market last Friday, driven in part by a break in a seven-week slide in U.S. crude oil prices. 

The oil markets didn’t do so well, Monday, however.  

Brent crude for March delivery fell 2.2% to about $49 a barrel on London’s ICE Futures exchange.

Meanwhile, Helming preaches a gospel of caution. He spoke to the American Society of Agricultural Consultants last October.

At the end of our conversation, I told Helming that I hoped his forecast for deflation is wrong.

“I do, too, to be  honest with you,” he replied. 


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