Beware of the deflation whirlpool

We live in interesting times.

During the past month, there has been great stock market volatility.


The Fed

There has been much market talk about when the US Federal Reserve will raise rates, perhaps as early as this June or September, from their current near-zero levels.

However, global economic events will influence the timing of rate hikes and are not really in the hands of the Fed at all.

With deflation a worry in Europe, central banks in Switzerland, Sweden and Denmark have already instituted negative interest rates.

Mighty Dollar

As the Fed moves toward higher interest rates while the rest of the world is trying to stimulate their economies with zero or lower borrowing rates, the dollar is soaring to record highs against the Euro.

An extremely strong currency is deflationary as the cost of imports declines driving prices lower, and causing the economy to slow down further by declining higher priced exports.

This results in less business activity and less employment even though prices are dipping. This is why the Fedtargets inflation at 2%, not 0%, to avoid the possibility of slipping into a deflationary economy.

There is no inflation in the US currently. Prices through January, 2015 declined at 0.1% rate.

So forget this talk of the Fed raising rates.  Not soon anyhow.
I expect the rates to be lowered and very soon to fight the deflation that is threatening our country.

Photo Credit: Chris Gladis via Flickr Creative Commons