The

Deflation Shock: The Global Commodity Price Drop and its

Geopolitical Ramifications

David Murrin is the author of Breaking the Code of History, the culmination
of decades of personal research across a wide range of disciplines. David
compellingly argues that human behaviour is not random, but determined by
specific, quantifiable and predictable patterns fuelled by our need to survive
and prosper. He has called this cycle The Five Stages of Empire, which due to
its fractal nature is applicable to empires, all the way down to the cycle of the
individual. According to David, to resolve the issues confronting us today we
cannot merely study the past. The human race will need to understand this
precise algorithm of behaviour that has caused us to re-enact the same
destructive cycles in ever-greater magnitudes, in order to change our future.
He is also a Global Fellow at PS21.

We have for quite a while now been predicting a sharp period of deflation
from 2015 to as late as 2018. This prediction has been based on the
Kondratieff cycles second phase, which corrects the first impulsive stage of
commodity inflation. We maintain our view, despite the assurances of various
central banks, that this is only a short-term dip. Indeed, the ongoing decline
in global commodity prices suggests that these deflationary dynamics will
accelerate in the next 12 to 18 months.
One of the interesting questions about the Kondratieff cycle is that its price
history has--until the past decade--been based on the cycle of the Super
Western Christian Empires as these were the dominant industrial powers
across the globe during the past two centuries. With the current dip in
Chinese demand, we are now able to confirm that the rising Super Asian
Empire has phased its commodity demand cycle with that of the West.
Why? Because this deflationary cycle has to a large extent been driven by the
loss of demand within the Chinese economy. As such, we should expect to
see that loss of Chinese demand continue for the next 12 to 18 months and
the Chinese authorities wrestle with increasing economic dislocation.

Deflation driven by loss of global demand like this is not easy to combat, as
the Chinese are now realising. For commodity prices to be where they are
now, it is clear that the world as led by China is suffering a slump in demand,
which suggests that economic growth is much lower than the worlds stock
markets are trying to reflect. This suggests that an imminent and very large
asset reprising will take place in the months ahead.
My concern is that this event will represent a global financial shock of greater
magnitude than 2008 and possible of a similar magnitude as 1929. The
Western Central Banks had financial levers to contain the shock of 2008,
which are now no longer available, so the impact will be much greater.
Indeed, the use of the printing presses in what we know as QE has inflated
stock and asset prices to completely unrealistic levels, and the gap below to
reality is probably greater than ever before. Hence, we should expect not only
very deep price drops, but moves that are very powerful.
In Breaking the Code of History, we discussed the concept that shocks such
as this deflationary shock affect every economy simultaneously and usually
with the same magnitude. However, what differentiates the strong from the
weak nations is the speed of the recovery and whether that recovery
subsequently reached new highs.
Although this shock started in China, this is not the all clear signal that the
Chinese challenge is ending, as I would anticipate that they recover faster
than any other nation. Conversely, I reckon that the greatest losers will be the
weaker Western nations. Certainly the EU is top of that list, but close behind
is America. Thus, I would expect this shock to accelerate the power shift from
West to East.
In addition to the effects associated with the long-term five stages of empires
cycles, changes in the commodity cycle create geopolitical shifts in power of
smaller cycle degree. In assessing the oncoming ramifications of global
deflation, the first nations to consider are the commodity producers
themselves.
Russia
Russia has been hit threefold with economic mismanagement, Western
sanctions and lower oil prices, which have placed it in a very precarious
situation. On one hand, there are the forces of economic implosion that might
lead to civil unrest against Putin, but on the other hand, there is the
argument that the West caused the problem via sanctions. Putin could use
any external event to trigger a war to unite his people in a common cause to

save himself. This situation needs to be carefully monitored and managed

and is a very high-risk scenario.
The United States
The effect of the price decline on America as a high-cost oil shale producer
seems to have been neglected with the ramifications of a massively shrinking
nations shale oil industry. America will be forced back into the geopolitical
sphere of oil importation and dependence on the Middle East and thus will
have to show a greater engagement against ISIL. The boost to its economy
from lower oil prices will not counter the overcooked price levels of the stock
markets hyped on QE. However, in the long term the inactive oil shale fields
will act as a national hedge for America as they could be reactivated when
the oil price goes up again after the bottom has been reached.
Government subsidies would enhance this process. Politically, this shock will
ensure that Obamas popularity plumbs new depths and that he will go down
in history as the most unpopular president ever, almost guaranteeing a
Republican winner the next time round. As per 1929, American investors will
be forced to withdraw their overseas capital to shore up the onshore balance
sheets, especially in the emerging markets. This will create future
opportunities for Chinese investment and increased influence.
Middle East
Saudi Arabia and Iran will once more become important due to the low cost of
their oil. However, the civil war in the Middle East is expected to continue and
intensify in complexity, especially if nuclear proliferation takes place.
Africa
Growth in Africa has been driven by the investment boom in commodities
coupled with indigenous demographic expansion. The latter is powerful
enough to maintain growth on its own, although at a lower level without the
commodity boost. However, nations such as Nigeria with dependence on oil
production will undergo considerable economic stress compounded by poor
governance.
Meanwhile, the importer of commodities might not find lower prices as
beneficial as one would have expected.
China

China will undergo a phase of significantly lower growth and retrenchment

with the demand gap. However, this period of economic uncertainty should
not be used to argue that a central demand economy does not work and will
fail, but rather be seen as a similar dip to the Asian crisis and a healthy
retracement. We would not expect to see no change in the aggressive
expansive Chinese foreign policy, indeed it may become more so, in balance
to its internal economic weakness. In addition, the Chinese will use this
commodity dip to keep buying the best assets at the lowest prices, as they
maintain a long-term view of their own growth just not present in the West.
Europe
The failed economics of Europe will make it most vulnerable to the effects of
deflation and asset price depreciation. This will most probably provide the
catalyst for the restructuring of the EU, with further knock-on effects for
global markets.
Thus, in summary, we expect the months ahead to produce both large
economic and geopolitical stress globally. Astute consumer nations should
use these price dips to acquire cheap assets and reduce future dependency
on importation. However bad the deflationary period may be, the ensuring
inflationary period will bring its own significant geopolitical changes.
Earlier versions of this article originally appeared on DavidMurrin.co.uk on
Monday, August 24, 2015 and Wednesday, August 26, 2015.
PS21 is a non-national, non-ideological, non-governmental organization. All
views expressed are the authors own.