Tuesday, November 11, 2008

The Dark Side of Lower Prices


I am certainly enjoying the plummeting price of oil and gasoline. However, as with anything, there may be a catch. As I noted here, it is not just oil that is dropping, but many other commodities and goods. While this sounds great from a consumer perspective, this article examines why most economists think - if it continues - it is not good at all.

"When prices start to fall because of lack of demand, they can go well below the cost it takes to produce products," said Bernard Baumohl, executive director of the Economic Outlook Group. "Companies have no alternative than to cut back production and lay off a lot of workers. That cuts demand more. You get this vicious downward spiral in prices."

Most economists point out that the current economic conditions do not yet suggest that deflation is present, or even imminent.

3 comments:

Greener Pastures said...

Thanks for a nice easy to follow explanation of deflation. I had thought I understood the concept, but this helped me to see it more clearly.

As far as gas prices falling- they owe us!

Global Patriot said...

The tragedy of market manipulation, based mainly on greed, is that the highs and lows are exaggerated - when on the increase commodities become unaffordable to much of the world population - when on the decline the costs of production are higher than market prices.

The ones who suffer least are those to speculate in the markets - adding zero value to the supply chain. If only there was a way to flush these slimy bastards down the cosmic drain.

Chief said...

I'm Bill Brasky, and I just cornered the market on booze! Who wants a drink?