Don't be confused by the rhetoric you read and see in the media. We are definitely in a deflationary spiral. Who says so? And what data are you looking at?
Let's read a few quotes from leading traders and analysts:
- Nobel laureate Joseph Stiglitz said: "Deflation is definitely a threat right now."
- Charles Evans, Federal Reserve bank president says: "Disinflationary winds are blowing with gale force effect."
- Bill Gross of Pimco said: The potential for a deflationary downdraft continues for several years" if growth does not accelerate.
- Former Fed Chairman, Alan Greenspan, said: "We are still, by any measure, in a disinflationary environment."
- Yellen states: "My personal belief is that the more significant threat to price stability over the next several years stems from the disinflationary forces unleashed by the enormous slack in the economy."
What are the data to support the notion of deflation in our economy?
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The Core CPI is down 2.5% from last year.
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The economy shrank 3.8% during the current recession, the biggest drop since the 1930s.
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Only 68.6% of the country's factories, utilities, and mines were in use during August.
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The unemployment rate is 9.8%.
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According to a survey by Bloomberg News, economists are projecting only 2.4% growth for the first quarter compared with a drop of 6.4% in the first quarter of 2009.
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Oil prices have fallen from $147.00 per barrel to about $70.00 per barrel.
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Gary Schilling says: "Look what is happening to the money supply, it is actually contracting now when supposedly the economy is picking up."
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Profits for the S&P companies fell 28% in the quarter ending June 30.
So what we have is a lot of talk about the economy getting better while the reality is that we are still in the doldrums, wallowing around the bottom of the trough. Make no mistake. These are deflationary times. Yes, retailers seem to be selling more units but they are actually dumping inventory at depressed prices to stay afloat.
The dollar is being allowed to drift lower to keep commodity prices up. Higher raw materials mean higher prices for finished goods and hence the appearance that all is well.
Do you believe that the economy will pick up steam next year?
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Reader Comments (Page 1 of 1)
10-02-2009 @ 9:48PM
ben said...
deflation maybe a painful process but it is the cure.
Whoever tries to stop that is a threat to the economy.
10-02-2009 @ 11:50PM
Santon60 said...
Ben,
I respectfully disagree. Check history, deflation is as much, and probably more of a threat to an economy as inflation. It might be a toss-up, but it is definitely worth trying to prevent.
10-03-2009 @ 5:27AM
al coholic said...
Where I live the local hospital system raised it's rates 3% this month. Duke Energy is in the process of getting a 9.3% rate increase. No insurance protection I carry has done anything but go up in price, especially my health insurance premium. A box of cereal costs nearly five bucks these days and cheap hamburger is over $2.00/pound. I can't wait to see what my next set of tires costs. Anybody want to bet that gasoline and heating oil will go down in price anytime soon?
The only thing deflated these days is my bank account. For any item you name that is cheaper I can name you several that have increased. Why? Because in many industries there is a large barrior to entry. This leads to the formation of oligopolies and price manipulation never envisioned by our founding fathers who figured that competition would always keep things in check.
10-03-2009 @ 5:36AM
Richard Ballard said...
During deflationary times manufacturers cannot make a profit and factories close. Today the United States is a heavy importer of foreign-manufactured mundane commodities (US manufacturers cannot compete with foreign labor's lower wages) and we have a recurring monthly trade deficit. IMO the US's recurring monthly trade deficit is deflationary. IMO the solution is creation of high value US jobs. Richard Ballard www.myspace.com/rjballard
10-03-2009 @ 8:57AM
Rick said...
I also have to disagree with the Author, and I'm sorry it may not be so respectful. Let me be the first to say I'm no expert on the economy, but I don't think I HAVE to be to see holes in this article!
First of all I'm willing to bet every person quoted in this article started out saying they felt the economy was heading in the right direction. As anyone will tell you NONE of these "experts" want to be later quoted as wrong so they ALWAYS finish with a word of caution. All I'm saying is I'd like to see the WHOLE quote of each of these people not just part of it.
Regarding some of the facts; I think I can put a positive spin on some of the SAME facts given (and I'm not an economist!)
*The Core CPI is ONLY down 2.5% from last year, when it was down MUCH GREATER.
*Despite nearly 30% of the country's factories, utilities, and mines no longer in operation, the Unemployment rate is still under 10%.
- (this one I love)
*According to a survey by Bloomberg News, economists are projecting a 2.4% growth in the first quarter from [-6.4%] in the first quarter of 2009
- (seriously, how do you take a fact like that and make it sound negative... unless you work for FOX news?)
*Oil prices are now at a more realistic price from $147 per barrel landing at a manageable $70 per barrel.
- (just last summer everyone kept talking about how business can't afford to do business with oil prices at $147. SERIOUSLY how is THIS a bad thing!!??)
The author states that there is a lot of talk about the economy getting better (Actually I think some of his facts prove that). I guess it's all in perspective. I don't think what we have here is people talking all "rosy" about the Economy. Seems to me people are cautiously guessing - based on facts - that it's getting better. No one said it would happen before Christmas (or overnight).
I have to agree with Ben (and Santon60) - Deflation is PART of the cure to all this. However if you CAN avoid it all the better.
Where the Economy is concerned it's like they say - "What goes down must go up"