We rarely stop to think how important inflation is to the economy. For example, if inflation is sufficiently high, it will slightly offset normal depreciation in values of homes and business properties. Thus, home and business property values will tend to slightly rise over time. If banks can count on values of structures rising, rather than falling, over time, lenders can assume that mortgage loans are fairly risk-free, because the lender can count on getting its money back through the sale of the property, if the mortgage-holder defaults.
This same principle holds when energy and commodityproperties, such as coal mines , steel plants and oil fields, are financed. As long as energy prices keep rising, there is a good chance loans can be repaid. Once energy prices fall, debt defaults become a problem. Oil exporting countries also find that the taxes they can collect fall significantly. As a result, energy-exporting countries are in a far worse economic position once energy prices fall. Exporters of other commodities, such as metals, have a similar problem if prices fall.
In the last two paragraphs, I mentioned the impact on lenders and governments of rising or falling prices. Owners of properties are also affected by rising or falling prices. If prices rise, these owners can sell their assets, and make a profit. In fact, these owners have often purchased their properties with debt. If the price of the property rises, but the amount of debt is unaffected by inflation, the owner of the property can often get a disproportionate benefit of the price rise. Of course, if the value of a property falls, the property-owner is disproportionately affected by the fall of the price.
We are so used to a rising-price scenario that we have little understanding of how a flat or falling price scenario might work .
If commodity prices fall then a person can see why a commodity-producing country/company might have a big problem, if the price of that commodity suddenly falls. There is huge “balance sheet” impact that doesn’t directly affect current GDP/Balancesheet as reported (since GDP/balancesheet has to do with current value of goods and services produced). But it can have a major impact , as it goes forward, because affected loans are much less likely to be repaid. Lenders often try to be lenient with commodity producing countries/companies, hoping that commodity prices will rise again. But if the drop in prices is permanent, commodity producers must use more and more extreme measures to hide the problem of loans that have a low probability of repayment in a low-priced commodity environment. Eventually, these loans seem likely to default, if prices do not rise sufficiently. China , PSU Banks and many commodity-exporting countries seem to be affected by this problem.
Conclusion
We have kept Global Economy expanding through growing debt use ( china is responsible for more than 70% global credit growth in last five years) and growing energy use.Now there is just too much buildup of debt globally and we seem to be reaching the end of the line. The global economy is getting very close to stall speed.
Central Bankers globally talk about 2-3 percent as inflation target but i am pretty sure they must be silently praying for higher inflation. The Federal Reserve talks about inflation rates above 2% being too high, but inflation rates below 2% are at equally problematic. Somehow, the debt system needs to keep operating for the whole system to work and for it the world needs HIGHER INFLATION NOT LOWER INFLATION.
Read More below
https://ourfiniteworld.com/2017/04/17/the-economy-is-like-a-circus/