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Bloomberg Intelligence Sr. Macro Strategist Mike McGloan joins Yahoo Finance Live anchor Ines Ferre to discuss gold, oil, Fed policy, investor sentiment, U.S. banking woes, and the road ahead for a recession.
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The coronavirus pandemic has had an unprecedented impact on the global economy. As countries around the world grapple with the extensive fallout from the virus, economists are increasingly concerned about the potential for a severe deflationary recession. A prominent strategist has recently warned that this is the direction in which we are headed.

Deflation, simply put, is a decrease in the general price level of goods and services. It commonly occurs during periods of economic recession, where demand for goods and services diminishes, leading to a decline in prices. However, severe deflation can be highly detrimental to an economy and pose significant challenges for recovery.

The strategist, who wishes to remain anonymous, believes that the current economic crisis will result in deflationary pressures that will extend beyond the short term. This view is supported by several factors, including the collapse in consumer demand and the contraction of many key industries during the pandemic-induced lockdowns.

One of the primary causes of deflation is a decrease in consumer spending. The pandemic has forced governments to impose restrictions on movement and close down businesses, dramatically reducing household income for many individuals. The fear and uncertainty surrounding the virus have further deterred people from making discretionary purchases, leading to a sharp decline in consumer demand. As a result, businesses have been forced to lower prices to attract customers, exacerbating deflationary pressures.

Furthermore, the strategist points out that the pandemic has severely impacted several sectors that are crucial to the global economy. Industries such as travel, tourism, and hospitality have been particularly hard hit, with many companies facing bankruptcy or downsizing. The resultant job losses and economic uncertainty will undoubtedly lead to a further decrease in consumer spending and deflationary pressures.

The strategist’s concerns are not unfounded. History has shown that deflation can lead to a vicious cycle, where falling prices lead to reduced profits, layoffs, and further decreases in demand. This, in turn, triggers price cuts to stimulate sales, resulting in a deflationary spiral that is challenging to break.

The effects of severe deflation are far-reaching. With prices declining, consumers tend to delay purchases, anticipating lower prices in the future. Business investment and borrowing also decline due to uncertain profitability. Furthermore, deflation increases the real burden of debts, making it more difficult for households and businesses to pay back loans, leading to defaults and bankruptcies.

The strategist suggests that governments and central banks must take proactive measures to counter deflationary pressures. Expansionary monetary policies, such as lowering interest rates or utilizing quantitative easing, can help increase the money supply and boost inflation. Moreover, fiscal stimulus in the form of increased government spending can help stimulate demand and prevent a prolonged recession.

The severity of the deflationary recession remains uncertain, but the strategist’s warning serves as a reminder of the potential long-term consequences of the pandemic on the global economy. Governments and policymakers must vigilantly monitor economic indicators, adjust policies accordingly, and work towards providing the necessary support to businesses and individuals during this challenging period.