Deflation - What’s Not To Love?
One economic theme that has started to creep into the news lately has to do with deflation, which is a general lowering of prices. Certainly nobody’s complaining about the decrease in gas prices, myself include, so it seems like a good thing overall, right?
Unfortunately, deflation, while not as bad as inflation coupled with a shrinking economy (aka “stagflation”), is not a sign of happy times in the short term. Here’s an explanation that sums up the problems with deflation perfectly from Canada.com:
“Deflation, like runaway inflation, can be self-perpetuating insofar as consumers defer expenditures in expectation of further discounting and this delay itself reinforces the discounting trend by putting downward pressure on domestic demand,” the Merrill Lynch economist said.
“Likewise, firms that are faced with deflation to their top lines are typically forced to cut costs to protect their profit margins and in so doing, trigger a second-round negative income effect on their workers and suppliers, which also ends up exacerbating the trend towards lower pricing.”
So, people spend less because they think things will be more “on sale” later. This is why we constantly see stories about consumer spending in the news, why President Bush told us all to go shopping after 9/11, and why the retail outlook for this upcoming holiday season has businesses and economists very worried. Without money in constant circulation, businesses have to cut back on their production. When businesses have to cut back, people get laid off. Further, new offices and factories don’t get built, which impacts companies in the construction industry. Sales tax and other tax revenue decreases, which impacts social services and infrastructure maintenance (and jobs in those areas), and the whole mess just keeps spiraling down the toilet.
Unfortunately, this is a painful period that we have to go through in order to recover. Just as wildfires can be brutally destructive but ultimately healthy for a forest’s ecosystem, we can’t just keep spending and spending just to maintain an economic “boom.” Indeed, that’s what we’ve done for the last several years and we’re seeing the results crash down around us. In the meantime, you may at least see some reduction in your short term interest rate obligations (home equity lines, for example), so take advantage while you can and get some of those debts paid off.
