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The Issue of Inflation and Deflation and Oil Prices

SK O'Neal
26 December 2014

This picture [1] contrasts strongly with Martin Armstrong and Harry Dent's views of deflation from collapse of the emerging markets and strength of the dollar relative to them, but agrees with the view of the gold bugs such as Schiff and a number of other independent analysts such as Jim Rickards [3].  The majority of analysts indicate global currency collapse, in contrast to the Armstrong-Dent view that the dollar will remain standing because of relative strength.  An important question is how the US, considering its serious latent insolvency from entitlement obligations that dwarf the national debt by a factor of ten, and from the derivatives credit system another factor of ten larger, will remain standing as well.  I know that Armstrong is adamant about the blindness of these other analysts who think inflation is the issue, but right now Armstrong has been correct, as we see a serious movement into deflation.  This situation is of course now seen through the movement of oil, but must then be explained   This Aljazeera report is a valuable discussion.  [4]

Precious metals and oil

Beyond its historical role as real money [2], a major key in understanding the price of gold is the price of oil, both from the general commodities track but also the overall progression and recession of the economic conditions.  Apparently the fellow from India feels that OPEC really blew it by failing to reduce output when softness in demand occurred a few months ago.  There are also divergent opinions on world demand for oil next year.  I think that weakness in world economic growth over the next year or two spells weakness in oil and will therefore make metals flaccid in that same time period.  Meanwhile nations in debt, a ubiquitous situation, will find themselves in increasingly weaker positions, and this supports Armstrong's position.  No mention was made about the West pressuring Russia with low oil prices, but we do not know the reasons why OPEC kept production up in front of weak demand.  It is hard to imaging OPEC playing to US demands for strategic manipulations.  The eventual effect may be either a terrible collapse in economic growth for a number of years or realignments that will demand more oil and then find supply lacking because of retarded investment in shale operations.  Falling oil, especially so rapidly, due to anomaly in OPEC output policy may well have taken the Fed surprise, and has curtailed the start of their interest rate path to three and  a quarter percent over the next couple of years.  It appears that the overall situation may well be significantly unpredictable, but that there are strong indications of deflationary pressures that will follow weakness in commodity demand.  Another factor mentioned is the US shale oil production coming on line.  But the price basis is relatively high, so there should be a support level for oil prices in the 70-85 dollar range, or else the oil will be extracted at a loss, which cannot be sustained for a long time unless ther is a sufficiently strategic reason to do so.  I doubt that the oil companies will sustain such a situation very long.  A similar situation exists in silver mining in which silver is trading below cost of mining for a number of companies, although the calculation of actual cost is often clouded by difficulties in partitioning the silver cost from other principal metals in a mine.

It is mentioned that sixteen percent of junk debt in the US is with energy companies, and this must be performing disastrously.  The question is whether or not the  drop in oil demand is due to a fundamental drop in the world economy, and not a transient market condition.  The oil producing nations have become drunk on high oil prices and their budgets have acclimated to them as well, like every government agency and municipality in the US, expecting ever higher growth.  We add to this the discussion put forth by Lindsey Williams several years ago about the end stage process of getting everyone as in debt as possible and then pulling the plug (heralded with higher interest rates), and note the recent rise in credit and Fed interest rate policy, and this picture makes sense - Armstrong's argument becomes stronger.  Another undetermined variable is the other resolution to collapsing world economic conditions - the item that started in Europe in the early 1900s, two world wars.  Russia and other nations need around a hundred dollars per barrel to balance their budgets.  If the current price suppression continues, then conditions for a crisis become ripe.  It would not be surprising to see an attack on oil shipping routes or some other artifact of war occur in the next year.   The Seven Sisters are taking huge losses at the moment and they are quite capable of fomenting a modest crisis as well, including refinery issues that could throttle supply, artificially increasing demand above supply for gasoline and diesel.  Reluctance by the White House to support the Keystone pipeline project indicates the possibility of foreknowledge dating back a couple of years, as it appears that someone who steers policy knew that the oil shale would not be profitable for a period of time.  This suggests that current oil price is both deliberate and also may hold for a significant time-frame.  We are therefore left with two opposing lines of indication for causes of low oil prices, one anticipated and the other paroxysmal.  Given that past recession-depression cycles have been on the order of a decade, there is much concern that this weakness in world commerce, especially in light of the ridiculous debt spectrum, will last a similar length of time.  There is also an historical pattern of major war following after, completing the transfer of wealth of the general population under the chaos of duress.     


The is no conclusion.  The picture of which way currencies will go or for that matter the state of humanity contains an arguably unprecedented degree of uncertainty that is reflected by the polarity of analytical predictions.  At a more fundamental level, it might pay to comprehend the future on the basis of the ethical state of humanity, except that the world has been run by crime families for thousands of years, and we must then filter the effect of knowing about them with newfound clarity of the communication system we now have.  It appears safe to say that we all are going to be a lot poorer, and that new social structures will be required to survive and eventually build upon the ultimate collapse of the current socioeconomic paradigm.  For all its dreadful appointments, war is the lesser villain, when compared to a gradual orderly descent into a global police state, that we can only begin to imagine from the prospect of Hitler's success, only augmented with every electronic and chemical invasion of our physical existences.   The analysts who argue without reservation and see only calamity must be evaluated on the basis of a religious bias applied with effect of Darby over-extension of immediacy.  It cannot be ignored, however, that the warnings of the prophets are severe, and that at some point difficult to objectively determine, destructive collapse of our spiritually compromised society will ultimately occur.


[1] Dave Hodges article 12-26-2014

[2]   Michael Maloney - discussions et al

[3]  Jim  Rickards - "The Death of Money"

[4]℠ (Right-side navigation page SSI insertion)