Watch out what you wish for, the old saying goes, because you just might get it. Are you (or someone you love) the consummate shopper who holds out for the best bargains and will shop, shop, shop till you either find the best bargain or drop? Well, your time may be coming. A friend whispers in my ear, over and over – ‘if you really want to buy something, just wait a month or two, everything is getting cheaper.’
That concept unfortunately holds both the problem and the solution in its grasp. Every day now we get new zinger economic news – we break records, set new marks, and upend the quant statistics counters. The Consumer Price Index fell 1 percent in October, according to the Labor Department – the biggest drop in the 61-year history of the consumer price index – Truman was President last time we had this kind of one-month slide.
Deflation, the other D – word, is being discussed as that rare something which has gone from a remote chance to something now whose chances are increasing, although it is still in the ‘we don’t have to freak out about this right away’ category. Inflation is when prices rise and Deflation is when they fall – precariously. Inflation is supposedly cured by interest rate increases and other tweaks.
Deflation is only cured, say the gurus of these things, by printing more money and trying to get people to spend that money to prop up prices. Good luck with that right now. Consumers are hanging onto their dollars hard enough to make the eagle grin, as they used to say back when we had eagles on our currency. We are giving new meaning to the word ‘thrifty,’ fancy restaurants and other watering holes of conspicuous consumption are going without consumers consuming.
Weren’t we worried about inflation not so long ago, like last Spring? How did the situation flip over, upside down so fast? Fed Vice Chairman, Donald L. Kohn, speaking at a Washington conference observed of the increasing risk of Deflation: “Whatever I thought that risk was, four or five months ago, I think it is bigger now even if it is still small.” In a credit-based economy, such as our own, when money supply falls, this leads to significantly less lending, something that has been happening as credit markets have literally frozen up – this causes another distinct fall in money supply, and then a resulting sharp fall-off in demand for goods, and on and on. No less a personage than Ben Bernanke, in his Studies of the Great Depression, concluded that, in response to decreased demand, the Federal Reserve of the Depression era decreased the money supply, hence actually contributing to deflation.
So now, along with the other basket of D –words like Death, Divorce, Depression, we also have Deflation to worry about. I knew this was going to be an interesting year.
So, let me get this right. This Deflation, the idea that my big screen TV that has been waiting for me over at Costco for the NFL playoffs will now cost me less as a reward for waiting, this is a bad thing? Or, is this one of those cultural sea changes which we neither like nor understand but we are told that we now have to throw our minds around and greet warmly?
The history books tell us – Galbraith’s classic study of the Great Depression, for one example – that the Deflationary Spiral is what caused and prolonged the Depression of the 1930’s and that mistakes were made which rendered that Black Hole of spiraling Deflation something which sucked in, not only the US economy, but also many others worldwide. Will historians write today’s headlines as more of those same mistakes which hurt instead of helped us climb out of the hole we find ourselves in?
Or, as I previously wrote when the Fed lowered their rate last time, will we be sliding into a Lost Decade like Japan experienced in the 90’s as it’s economy was sucked down into a Deflationary spiral that they couldn’t stop? And, if we use lowering of interest rates to combat deflation what do we do when we have no more room to lower interest rates – charge for the privilege of holding money? Sustained, low real rates can be the direct cause of higher asset prices and excessive debt accumulation. Lower interest rates may prove to be but a Band-Aid, leading to an even worse Deflation crisis.
As Ollie said in the aptly named Laurel and Hardy movie: "Well, here’s another nice mess you’ve gotten me into."