The Real Risks Of Deflation
By Justin Gardner | Related entries in Business, Economy, Money, VideoAt first, lower prices don’t sound like a bad thing. But if stores need to drop prices in order to sell stuff, that means lower wages for workers which means less money going back into the economy, which means less being bought, which means prices start to drop more and you can see that the spiral keeps going down, down, down.
CBS has the story…
October saw a 1% drop in the Consumer Price Index, which is the largest single month drop in over 61 years. True, some of that was due to gas prices, but certainly not all, and if this keeps up (mixed with a likely mediocre shopping season), Obama will have to address this problem along with all the budget shortfalls.
That’s why I said yesterday that what you’ll probably see from Obama next year is a massive stimulus package (long term solution) mixed with the printing of more money to drive inflation (short term solution).
More as it develops…
This entry was posted on Tuesday, December 2nd, 2008 and is filed under Business, Economy, Money, Video. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
December 2nd, 2008 at 8:04 am
I think it’s good when we talk about inflation and deflation and how they work.People need to undersatnd economics.
I also think it would be very useful if, while doing so, we can avoid using the word “spiral.”
December 2nd, 2008 at 8:42 am
Kranky Kritter - yes a general economic education is a good thing, but one can not know inflation and deflation without knowing the difference between absolute (nominal) and relative (real) price and that is a major problem with this discussion. There is no indication of harmful deflation in terms of relative (real) prices.
Some of greatest periods of economic growth in the U.S. have occured during times of nominal deflation of goods/services. The charlatan chicken-littles out there screaming the evils of deflation are the same brain-trust that supported the kind of spastic monetary policy and Fannie/Freddie Keynesian policies that forced this unpleasantry upon us. (And we are about to do it again, yipee!)
Anyway, a little bit of knowledge is always a very dangerous thing.
December 2nd, 2008 at 11:31 am
Man, and it seems just like three months ago that everyone was wringing their hands over stagflation. Oil/gas prices are really the biggest culprit. The rollercoaster costs of oil coupled with the recession have done a whammy on these kinds of measurements. I think we may want to give it more than one month of recorded deflation before we start demanding giant spending plans and printing more money.
December 2nd, 2008 at 12:17 pm
JH-right. That’s why I suggested it was worthwhile to talk about such matters, but inflammatory to use words like “spiral.”
After all, are there any examples of an uncontrolled spiral that lead to happy endings? The silver linings these days are thin and spotty. So I intend to enjoy gas at $1.70 per gallon and hope that we see a downturn in the everyday commodities whose prices ticked up when gas spiked. For example, I am fairly sure that paying less to heat my house this year than last counts as a bit of good news. If the dow hits 6000 I expect to change my mind, though.
What we are seeing now is a whole lot of economic volatility. And obviously that’s unsettling. But w don’t really need the media rushing to tell us why every single big change could be more bad news. It’s going to be a rocky up and down ride. Look at what the stock market has been doing…after a big downturn it has been comparatively stable but over a broad range from roughly 8000 to 9000. Up and down can make you sick. But it’s better than down and down, right?
December 2nd, 2008 at 12:18 pm
Inflation wouldn’t be a terrible thing IMO.
For one thing it would reduce the value of the dollar vs. other currencies. This is great for exporters — their pay is in Euros (or whatever), but their costs are in dollars. So when the dollar goes down their cost stays the same, technically their revenue stays the same, but it now buys more dollars!
It would also help with debt. Inflation means your check probably gets bigger. It may (or may not) buy as much bread, but the bottom line gets bigger. Your mortgage, OTOH, stays the same.
Inflation would suck for a lot of people. In particular folks who saved would be screwed because their savings are now worth less. And it’s entirely possible inflation would rise faster than wages, which would hurt everybody.
The Dollar is currently a de facto international currency. Many, many people and countries use it. If it loses value that may change. I have no idea how that would affect our economy, but I doubt it would be good.
December 2nd, 2008 at 7:49 pm
Deflation also has a double edge negative effect. Not only does it lower the price you can get for your goods, it lowers the value of your assets, including, especially bad for retailers, the value of your inventory. As you earn less in bottom line profits, your assets deflate making it harder to build inventory. Ouch…
What ever happened to those inflation hawks? It wasn’t that long ago that the Fed was on that lowering interest rates for fear of that economy destroying inflation. Every time the Fed tried to balance things and raise rates Wall St. would be up in arms against them. Now they’re getting criticized for going too far the other way. Everybody’s a Monday morning quarterback!