Sunday, February 08, 2009
There is some real progress being made in the mainstream media's handling of the ongoing "deflation" debate if this report by David Pierson in today's Los Angeles Times is any indication of what is to come.
Now if they could just stop using the word completely, maybe we could make even more progress.
It has taken some time, but this could be the first occasion where somebody writes a story about "deflation" and gets right to the point that falling prices are simply a result of another asset bubble having burst (or, what would be referred to in contemporary economic parlance as a severe economic contraction).
As an added bonus, Mr. Pierson deftly avoids the most annoying of all "deflation" myths. That is, that consumers will slow their purchases due to falling prices - as if somehow falling prices were the real driver, rather than the bursting of the asset bubble.
That argument was valid a hundred years ago, but not today.
As every right-thinking amateur economist knows, falling prices are just a symptom of the much larger problem that what passes for competence in the practice of modern day economics is to somehow create an even bigger asset bubble to replace the one that just burst.
The bigger the asset bubble, the bigger the economic slowdown when it bursts.
The bigger the economic slowdown, the more likely it is that, at some point, consumer prices might decline.
It should be clear to all but the ignoramuses of the world that, today, people are spending less (reducing the demand part of the price equation) because they are scared to death of what lies ahead, fearful of losing their jobs after already having given up hope of maintaining their home-equity enabled lifestyle, and that these decisions have nothing to do with falling prices.
Deflation: When low prices buy high anxietyThat's progress indeed.
In a weak economy, prices may drop, but so do wages and job security.
Wedding photographer Pogos Kuregyan has lowered his prices.
FedEx aircraft inspector Dan Wallace is dealing with a salary cut and a retirement fund that's lost half its value.
Though prices are down for food, housing, energy and clothing, they can't buy much, because they're living on less.
After years of worrying about inflation, some economists fear the opposite could soon happen: deflation, an extended period of falling prices that indicates the economy is in a backward spiral.
Millions of Americans have less money coming in than before the recession, and their net worth has also shrunk. That means less to spend on food, clothes, gasoline, cars and shelter. And despite discounts at the store and the car dealership, a lowering of rents and a near-historic drop in the price of houses, people just aren't buying much.
The fear about this recession rests on the severity of the real estate crash and credit crunch, which translates into pain for any homeowner who sank savings into a house only to see property values plummet. Those people are facing a cash crunch of their own.
There may even be signs that -- as they did during and after the Great Depression of the 1930s -- consumers will change the way they manage money, saving more and spending considerably less. Although few would argue that this is not a more conservative and ultimately safer way for American families to live, it could push deflationary trends in the economy even further.
This week's cartoon from The Economist: