Inflation
Inflation is traditionally defined as a consistent rise in the price rates within a specific industry or in the entire economy of the state, which is triggered by a rapid increase in demand: “Inflation is a situation in which, on the average, all individual prices are rising in terms of whatever is called money” (Makiinen 344); therefore, the increase in its rates is justifiably considered to be one of the factors that affect the state economy most negatively. When it comes to defining the effects of inflation on the Saudi stock market, one must mention that the latter shrinks significantly as the inflation rates increase.
Similarly, inflation has a range of negative effects on the U.S. stock market, seeing that it makes the key stakeholders lose an impressive amount of revenues.
As the chart provided above shows, the recent drop in the Dow Jones Rates signifies that the inflation issues in the United States are getting increasingly positive as far as the overall state of the American economy is concerned. Even though the infamous crisis of 2007–2008 (Makiinen 119) has had a rather drastic effect on the U.S. stock market, the performance of the latter can be deemed as quite positive at present. Nevertheless, the lack of stability in the recent
It would be wrong to claim, though, that inflation has only negative effects on stock markets in general and the designated ones in particular. By definition, inflation allows for the adjustment of relative prices (Makiinen 36), therefore, creating more room for providing customers with an opportunity to save by developing a more flexible pricing strategy. Nevertheless, when swinging out of control, inflation poses a significant threat to the wellbeing of the stock market. Hence, the inflation rates should be reduced in the U.S. and the UAE so that the corresponding stock markets could function properly.
Addressing Inflation Rates Concerns
To address the above-mentioned concern regarding the UAE inflation rates, which seem to have been unreasonably high since the infamous crisis of 2007–2008, the state government will have to introduce certain changes to the oil industry as one of the most profitable ones in the target market. Indeed, the consistent success, that the target industry has seen, is likely to serve as a major boost to the state economy and, therefore, bring the inflation rates down.
Apart from the above-mentioned solution, the choice of a supply slide policy should be viewed as an opportunity. There is no need to stress that the specified approach is typically viewed as the most common tool for addressing the inflation issue; however, the consistent use thereof does not make it any less efficient. It should be borne in mind, though, that the specified tool may require a significant period to take its effect on the state economy and the wellbeing of the U.S. residents, the outcomes of the policy in question still can be deemed as very strong. Therefore, the specified approach deserves to be taken into consideration as the means of managing the inflation rates in the state.
Deflation
Likewise, deflation can be viewed as a rather negative factor altering the environment of both the American and the Saudi Stock markets. According to the existing definition, deflation is typically identified as a reduction in the price rates in the economy of a specific country or the environment of a certain market: “The standard definition of inflation is a protracted period of generalized price increase, which can occur when too much money causes too few products” (Odekon 202). Therefore, it can be assumed that the specified phenomenon triggers a rapid decline in the profit of the target markets. Indeed, a closer look at the recent changes in the U.S. stock market caused by deflation will reveal that the market has suffered a drastic change once the increased deflation rates were introduced to it.
Likewise, the UAE market also experienced a significant drop in its growth rates as the deflation rates peaked in 2010. The specified phenomenon can be attributed to the fact that the organization has been experiencing a significant slowdown in its economic development, in general, and the recuperation of the oil industry, in particular, after the infamous crisis of 2007–2008. As the studies on the subject matter show, the state organizations along with private firms have experienced a significant drop in the stock prices; hence the necessity to galvanize the state economy by increasing prices for other commodities emerged. Although the UAE economy seems to have evaded the trap of deflation, some of its effects may still challenge the further evolution of the state economy and trigger rather undesirable results; for instance, a recent analysis of the UEA economy has shown that the deflation issue still echoes in some of the areas of the UAE economy: “According to HSBC UAE Purchasing Managers’ Index, overall input prices continued to increase in the UAE non-oil producing private sector during December. The rate of input price inflation eased and was the lowest since September 2010” (John par. 1).
Addressing the Issue of Deflation
A closer look at the target economies will reveal that the UAE is currently under a threat of facing deflation. Indeed, as a recent analysis of the current economic situation in the state shows, the prices for a range of goods and services have plummeted, thus, leaving several organizations suffering from a lack of income and, thus, facing the threat of an untimely demise (Jones par. 8)
Herein the threat of deflation to the UAE economy lies; if allowing the process of deflation to get out of hand, the government is likely to face severe issues regarding the rapid demise of a range of small and even medium organizations, particularly, sole proprietorships, which are especially vulnerable to the changes in the currency rates
When addressing the issue of deflation, one should view the adoption of the above-mentioned approach strategy as an opportunity. Although reducing interest rates seems the first-choice solution, it may lead to no effect in situations that include the so-called liquidity trap. Defined as “A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth” (Freenstra and Taylor 87), the latter is likely to impede the promotion of sufficient spending rates among the U.S. population; consequently, the economic conflict in question may spin out of control.
Conclusion
While the effects of the inflation on the U.S. and the UAE stock market can be viewed as having a partially two-sided effect on the state economy, one still has to admit that, when spinning out of control, they start posing a serious threat to the financial and economic wellbeing of not only the private and state entrepreneurship but also to the citizens. It is recommended, thus, that the governments of both states should consider the introduction of the tools that will help manage the inflation rates in; particularly, the adoption of the contractionary policy as the most popular tool for addressing the inflation-related issues and the tools for increasing the commercial bank’s revenues should be viewed as the most reasonable options.
References
Dow Jones Industrial Average 2006-2015 2015. Web.
Freenstra, Rovert C. and Alan M. Taylor. International Macroeconomics (Loose Leaf). 2nd ed. London, UK: Worth Publishers, 2013. Print.
John, Isaac. “Dubai Posts Deflation in 2012.” Khalee Times 24 2013. Web.
Jones, Harvey. “UAE Investors Ponder the Spectre of Deflation.” The National Business 2015. Web.
Makiinen, Gail E. Money, Banking, and Economic Activity. New York City, NY: Academic Press, 2014. Print.
Odekon, Mehmet. Booms and Busts: An Encyclopedia of Economic History from the First Stock Market Crash of 1792 to the Current Global Economic Crisis. New York City, New York: Routledge, 2015. Print.