So often we hear about deflation in the business cycle. A key question for many is when will this happen and how will it affect the business cycle? When is deflation likely to occur? What causes it?
When in the business cycle when is deflation likely to occur?
The answer depends on several factors. It can be caused by an increase in stock market price as investors become fearful of investing in the real estate market. With less money available for investments, companies cut back on their purchases of goods and services which lead to a reduction in business sales and employment.
The decrease in sales results in less income from sales to be distributed. More of the income goes to taxes and other government expenses resulting in less money coming in the economy. In the short run, this causes consumers to have less spending power and leads to a contraction in the economy.
Is this in the business cycle when is deflation likely to occur in the long run? Yes. This is a problem in the United States. Inflation is low and the Federal Reserve is raising interest rates to cool the economy. Since money is still flowing the economy is becoming more sluggish.
So, what does all this have to do with forecasting the future of the economy?
Most importantly, it tells us that deflation is here to stay. It is a symptom of an economy that is experiencing an extended period of excess money supply. When economies become too dependent on external sources of funds, they tend to slow down growth. They fail to create sufficient jobs for the population which leads to rising unemployment and poverty.
This brings us to a point where in the business cycle when is deflation likely to occur. The best time to invest is now. Gold has always outperformed other investments over the long term. Its value is not influenced by economics. Therefore, it is a great time to invest in gold.
The best place to look for economic indicators is the stock market. However, you should use a variety of different economic indicators in combination with each other to make your decision. Keep your eye on the economic news reflecting the strength and weakness of all the different companies in the market as well as how other investors are reacting to the market.
One indicator that many investors consider is the price of oil. For most of the past decade oil prices have consistently been higher than the inflation rate in the United States. If the price of oil falls suddenly there could be a panic outflow of capital from investors who had bought during an up cycle. The result would be a recession in the economy. However, if the price of oil continues to rise then the economy is considered to be in an up cycle, which means that deflation may not occur because the economy will be operating using surplus money supply.
One indicator that you should consider in the business cycle when is deflation likely to occur is the behavior of the interest rates. Historically interest rates have been cut during upswings in the economy and they have been cut even during downswings. If the Federal Reserve raises the interest rates in the economy can grow in the up cycle but the unemployment rate will rise above that level causing deflation. When you are buying during an up cycle and the economy is growing the cost of goods should be increasing and the price of goods should be rising along with it.