This term keeps popping up in the news, along with the statements that it is bad and that wages are “sticky”.
I feel that deflation is a very good thing in our situation and that the government should not inject money into our economy to get rid of deflation. Prices are falling, they need to fall until they find equilibrium. Wages also need to fall until they find equilibrium.
Businesses would rather lay people off than cut back their wages, hence the “sticky” moniker. I don’t get this. I would rather take a 25% reduction in my wages than lose my job, especially when I know that there are little or no jobs available.
Unions reaction to this concept is even more fascinating. They would rather kill the company than face reality. I guess this is not so surprising since management-union relations in this country are so wrought with animosity. It is never a win-win partnership.
Replies
If the deflation were to be applied to everyone equally, then maybe we could deal better with the issue. But it's not.
When "public servants," utility workers and other trades so protected, not to mention the bosses, also feel the effect, then again, maybe.
As republican as I am, I can see the unions point of view.
Deflation means major job losses and large increases in the cost of debt. You did not hear Citibank ask everyone to take a pay cut, you heard them lay a huge number of people off for good. If you are downsized and have a mortgage to pay, you're sunk. If you are not downsized, your cash position is good and your debt is minimal, you're good--you just got a tax free gain.
It is tempting to agree that deflation is necessary and that government should not interfere, that the weak should fall and find their own way to recover. Aparently the economists and others designing public policy in these times do not agree.
The thing is, businesses have traditionally used inflation to slowly "deflate" the value of wages. That way they get to give you a raise every so often and look like good guys, and if the business isn't going too well they just hang back on the wage increases.
It's a lot harder (both legally and in terms of employee goodwill) to give a worker a reduction in pay, so deflation does run into trouble with "sticky" wages, even without a union.
OTOH, for a retailer deflation is a windfall, since they can leave prices unchanged and make more profit. (Assuming they're hard-nosed enough to bargain down their suppliers.)
A lot of the way you view all of this depends on whether you view the economy unemotionally or emotionally. Thing is, while everyone claims to view it unemotionally, and classical economic theory (that regards inflation as "neutral") assumes unemotionality, in practice emotions (and just plain old habit) have a large effect on how the economy operates. Can't be ignored.
The issue with deflation has little to do with workers or consumers. It's about borrowers and savers. Inflation makes borrowing cheaper and saving more expensive; deflation does the opposite.
That's another aspect of it, and in many ways a more serious one in the present-day US -- which is a nation of borrowers.
The mark of the immature man is that he wants to die nobly for a cause, while the mark of a mature man is that he wants to live humbly for one. --Wilhelm Stekel
there was some discussion of this on our ChiefUser's emails... here's an excerpt
and a link.....
<<<<<Steve Watson & Paul WatsonInfowars.netTuesday, Dec 16, 2008 Army 'Strategic Shock' Report Says Troops May BeNeeded To Quell U.S. Civil Unrest"Purposeful domestic resistance" would requiremilitary to "rapidly determine the parameters defining the legitimateuse of military force inside the United States."A recent report produced by the U.S. Army WarCollege's Strategic Institute warns that the United States mayexperience massive civil unrest in the wake of a series of crises whichit has termed "strategic shock."............................(emphasis added)In the short term, the domesticdeployment of troops is likely aimed at combating likely civil unrestthat will ensue after a complete economic collapse followed by adevastating period of hyperinflation.This warning was again echoed afew days ago in a leaked internal memo from Citibank."The world is not going back tonormal after the magnitude of what they have done. When the dustsettles this will either work, and the money they have pushed into thesystem will feed through into an inflation shock," wrote TomFitzpatrick, Citibank¢s chief technical strategist. The memo predicts "depression,civil disorder and possibly wars" as a fallout from an economiccollapse that many say is on the horizon.________________________________The above is just part of the full article. Here is a link to the full article:http://infowars.net/articles/december2008/161208Unrest.htm>>>>>>>
Mike Hussein Smith Rhode Island : Design / Build / Repair / Restore
that is some scary stuff, the planning of deployments of troops to quell domestic resistance.
i hope it doesn't come to that. i wonder what the odds are, and if they are selling/marketing futures on wall st on the chance that it will?
It depends on how much the top 5% of the population fear it..
They run the country.. the rest of us just provide for them.
that is some scary stuff, the planning of deployments of troops to quell domestic resistance.
The last troop replacement I read about a few months ago showed that ONE Battalion was sent over and TWO were brought home... So much battle fatigue, yet half the number of replacements for expanding into Afghanistan getting ready for the National elections....
Makes you wonder if preparations are being made if/when things go sour here at home.... I'm trying to get all things in order with repairs on the home and outside buildings, septic systems serviced, looking a propane powered generator to power some home needs, a water well and aerobic septic system, storing some building supplies, and wondering what I should do for can goods and if some cash should be kept out of the bank...
Over prepared is as bad as being Under Prepared, but I wonder what I've forgotten???
Bill
sorry it took so long to get back,
I completely dissagree that over prepared is as bad as under prepared. how is it bad to be overprepared? worried for nothing is bad, but having stuff you may not need and peace of mind sounds good to me.
I did hear that now may be a good time to have some silver instead of cash, but things may change quickly so you might need to watch that and sell the silver if it looks like it will dip again.
Of course if the govt sends in the troops to quell domestic uprisings you will need to defend yourself against the possibility of roving bands of hoodlums and the troops not being where you need them. lots of ammo and defensible positions. might not be bad to be hooked up with a few neighbors.
the whole thing is very scary. i remember the rodney king riots, imagine if it got worse.
I completely dissagree that over prepared is as bad as under prepared. how is it bad to be overprepared? worried for nothing is bad, but having stuff you may not need and peace of mind sounds good to me.
I was in elementary school when the Russians put up Sputnik, and I remember all those people that put a whole lot of time and money into building bomb shelters... Back then, the enemy was across the ocean...and way above our heads...and still "America" was scared bad.
I just don't want to be one of those that spent their money on concrete and can goods, but then, it seems these days trouble is only as far away as the neighboring states or even as close as just down the road...
I'm reading that gold is up and silver is rising some, too, but it appears that people who can buy those things can't find much if any to buy... except on paper. At an upscale garage sale, I passed up a good 12 gauge Remington pump shotgun marked $175... mainly because I didn't know what to look for or what a good price was. But, gun powder, lead, and high quality plant seed may be the next commodities to start investing time and resources in....:>).... :>(
I guess I've answered my own delemia, for if you aren't over prepared in times like these, when should you be? In the coming NEW YEAR, getting more than just several extra cans of Black Eyed Peas for New Years Day just may be the most lucky thing you can do....
Bill
Bill
I'm on the mailing list for the Seargants Major's acadamy as well as several other professional development forums.
Planning consists of Assessing, Analyzing,Developing concurent courses of action, wargaming and selecting and implementing a COA.
All kinds of wild scenarios are presented and undergo the Military decision making process.
Most of the public would have a brain hemorage if they saw what was discussed and wargamed.
The War College is basically Phd Level work and they need harder more complex problems to work.
That's all that was about.
But if you ever get to Carlisle, stop in for a visit. It's a beautiful place.
Since we are a nation of borrowers and not savers inflation is better for Americans..
Deflation can work ok for you if you have lots and lots of money because you can buy more stuff for less.
The problem in the US (and UK) is that most people are up to their eyes in debt, which is the complete opposite of having lots of money. So, if you think of a mortgage, under deflation, the value of the house continues to drop but the obligation to repay the principal remains the same. People with debt (the majority) get deeper under water. If there is inflation, the value of the house goes up, closing the gap between what you got and what you owe.
As well, under deflation, everybody has an incentive to defer buying things because prices are dropping. Sort of the way technology works but for every commodity at the same time. That's bad for business and creates a downward spiral. WWII broke this spiral for US manufacturing due to helping Britain & the USSR & rearmament. There is little chance of a major war nowadays, and the US already spends wartime amounts on defense, so even that wouldn't work.
The only known solution to a massive debt is to print money and devalue the currency. This creates inflation and stimulates the export sector. It also screws the people with savings and/or those on a fixed income.
In any event, it is highly probable the US go the inflation/devaluation route. If if doesn't best start planting potatoes and gathering firewood.
>>Businesses would rather lay people off than cut back their wages, hence the "sticky" moniker. I don't get this. I would rather take a 25% reduction in my wages than lose my job, especially when I know that there are little or no jobs available.
Right, but put yourself in the position of the employer. Lay people off, and the unhappy folks walk out the door-and those who stay might have extra incentive to show how productive and valuable they are. Cut wages, and you will have a big chunk of employees with low morale, productivity falls, etc. That's the theory.
yeah, i know that that is the current thinking-i just don't agree with it.if you think about it, if you pared everyone's pay, they would be happy to just have a job. the would realize that there are no jobs to be had in a down economy.when a company goes through job cuts, the remaining employees still have the stress of thinking that they could lose their jobs.the current system just seems boneheaded and inefficient. think of all the training costs and experience that are lost with these layoffs.We are in more than a down economy. our country is experiencing a "rebooting" of our system-massive deflation will be required for us to become competitive once again.
I am with you on this. If a company was to cut wages but maybe give a bonus on profit sharing it should work itself out in the long run. Or even pay by piece work. Lincoln Welders pays by piece work and they have a 3 year waiting list of new employees. There is no Union there but most of the people make more than the big three auto workers. There was a story on it on 20/20 ten or fifteen years ago. If a part is defective it also comes out of their check too. They love it there.The company I am with pays lower wages but excellent bonuses based on job profits.Where there's a will, there are 500 relatives
Other than the emotional/sticky factors, an economy is essentially neutral to inflation or deflation, so long as it's reasonably anticipated.That said, the economy can't stand serious deflation right now unless there is some sort of nationwide reset on mortgages.
The mark of the immature man is that he wants to die nobly for a cause, while the mark of a mature man is that he wants to live humbly for one. --Wilhelm Stekel
Its not just the impact of deflation on specific individuals which matters, its the overall impact. As I said - if you have lots of cash and no debts, deflation is ideal for you. For anybody with debts, its really bad. Can you accept lower wages if your debt remains the same? One of the many problems of late is 'negative amortization' (debts growing by design), which is what would happen to all US debts under deflation. Many business and personal loans are demand loans - what do you think would happen if the underlying asset kept getting cheaper (imagine if mortgages were demand loans today!)That includes the government. The average consumer is up to their eyes in debt, and the government is even worse off and sinking deeper every day. Who would lend money at negative interest rates? The US government and individuals *need* 'foreign' debtors to keep the lights on - if you 'reset' mortgage or government debt, which you'd have to under deflation, else the would grow bigger and bigger, then you'd be essentially defaulting, or pulling an Ecuador.Deflation may appeal on an individual level, but its a disaster for an economy, and I'm virtually certain that whereever its happened the results have been cataclismic.
I'm curious to learn opinions regarding those who positioned themselves in the "high cash, no debt" model.
What is the general consensus?A La Carte Government funding... the real democracy.
My sole debt is my mortgage which as a percentage of my homes value is a small fraction.
Yet I would deeply love deep runaway inflation. That massively increases the dollar amount of all of my assests and makes paying off my mortgage even easier.. plus I would quickly have the mortgage paid off and then could figure out easy ways to isolate surplus cash from the ravages of inflation..
(convert that cash to real assests such as land or other finite sourced items (gold, oil, copper, etc..)
OK
BUt what's is the opinion of those that have already reached that goal?A La Carte Government funding... the real democracy.
inflation can be a massive help to everyone who doesn't have their head stuck in the sand.. It decreases the debts. (in relationship to the hours that are required to be worked to pay them back) It's negative effects to those with cash rich positions and with minimum debt by a simple transition to assests over cash.
Those on fixed incomes such as social security have their incomes adjusted automatically annually. Those with incomes from retirement accounts simply need to change investments into asset rich investments..
While it's true some will be hurt but those people would be hurt no matter what.. far better to minimize debt than to greatly increase it!
My question is lost with you, frenchy.... I don't need currency lessons.
Do you think of people, who are "debt free/cash heavy" in a positive or negative way. Are they bad for taking advantage of their thriftiness in these times of difficulty? Are they to be admired for their self-control and be allowed to profit. Are they to be despised as "profiteers" and punished relentlessly? Are they to be considered role models. Are they the scum of the earth for "not getting it"? Are they to be taxed into poverty because they actually have something to confiscate?
What is the prevailing opinion of those people who planned/prepared/sacrificed/profited from this current crisis?A La Carte Government funding... the real democracy.
No I don't think that's bad!
I'm saying that if they are smart enough to take advantage of the situation with no or little inflation they would also likely be smart enough to recognize the opportunities in high inflation circumstances.
There is greater opportunity for people to save in high inflation situations.. In China where the average income has doubled every 3 or 4 years they save more than 1/2 of their income.
In deflationary situations people struggle harder to pay bills and basic needs. in inflationary times it's an opportunity to pay off debts with easier money.. Once debts are paid they have the opportunity to either be smart and save or be a wastrel and spend.
I've never heard anyone suggest that savings should be taxed. (unless you consider the inflation a tax)
Edited 12/20/2008 5:34 pm ET by frenchy
I'd probably classify as "high cash, no debt", though the cash is nowhere neare as "high" as it was a year ago. I frankly can't see any big advantage to deflation, since it would negatively impact the interest and dividends I earn, and would prolong the recession.
The mark of the immature man is that he wants to die nobly for a cause, while the mark of a mature man is that he wants to live humbly for one. --Wilhelm Stekel
"I frankly can't see any big advantage to deflation, since it would negatively impact the interest and dividends I earn, and would prolong the recession."you sound like you are in a good financial position.deflation of housing prices for example are a very, very good thing. in the county where i live, the average income for a family of 4 is $60,000. I think that works out to a house affordability rate in the $250,000 or less range. The average house price is $420,000, as of a couple of months ago. The average price needs to "deflate" to meet that realistic demand price.it has continued to be kept artificially high by investors. but even their money is evaporating. so prices should continue to "deflate". mildly inconvenient in your case, and bad for a lot of people, but good in the long run.
The thing is, with deflation house prices will come down but so will incomes. From that standpoint it's essentially a wash.
The mark of the immature man is that he wants to die nobly for a cause, while the mark of a mature man is that he wants to live humbly for one. --Wilhelm Stekel
I don't really understand the question. I know a lot of people with very high incomes, many of those have very high debts (what can I tell you). Personally I have no debt, so I fit into that category. Almost all my investments are currently in cash because I can't figure out whether we are looking at deflation or inflation and different investment approaches work in different context. To simplify, long duration corporate bonds for deflation (you lock in high interest rates while the going rate goes negative) or high yielding stocks for inflation (dividends rise with inflation). If you do the wrong thing (bonds in inflation, stocks in deflation) you can get killed. I don't see any reason to rush that decision because one will have plenty of time to act as the situation develops - so much wealth has been destroyed, there is little change assets will price out quickly.So, from a personal perspective, deflation would be great for me, but I'd pity those with a more typical balance sheet.Anyhow, the consensus among the people with money is that deflation scares the hell out of them, more because of the impact on the broader economy than anything else.Having read a few more of the posts I think I understand a bit better: is it right to 'punish' those of us who behaved prudently?Absolutely not, it isn't, but that doesn't matter. The government and banks don't care about right or wrong, just about the situation. So, the government care about its massive debts and the outrage associated with those consumers with large debts and how you deal with that. The consumers with high debts may or may not be 'responsible' for their predicament - most I talk to are so clueless about finance I'd find it hard to find them responsible for their own lunch money. With respect to punishing the prudent through inflation, there are two classes of people with no debts - those with some cash, who would suffer, and those with a lot of cash who would still be ok.In a general sense, neither inflation or deflation is good. Deflation is much worse for more people when there is a lot of private, corporate, and government debt. Thats just the way it is: it has to be fixed, and the only fix is inflation. Its too bad, but thats how its going to go. The time for a painless fix was 6 or 7 years ago. Its too lat now and all you can do is accept the suffering that comes with a significant reduction in living standards.
Edited 12/21/2008 12:54 pm ET by Piccioni
Thank you for the thoughtful answer.
I'm afraid the responsible minority is soon to be lynched by the irresponsible majority.....
we better start planting potatoes.A La Carte Government funding... the real democracy.
Having lived through the "lost decade" of Japan (actually it's more like 18 years and counting) I cans say a couple of things about deflation from experience.1. housing costs came way down from a peak of 10X income to approx half that; meanwhile, holders of existing mortgages went deep underwater, averaging $150K. This kind of negative equity has a very depressing effect on consumer sentiment -- you just don't want to buy stuff, you want to save. And the ongoing deflation in housing values prevents people from wanting to own homes, they'd rather rent.2. consumer prices came down across the board, and this was great.3. wages came down across the board, with the median household suffering a 30% loss in income since 1990. For me, this translates into ongoing downward pressure on the fees I can charge my clients.Anyway, regardless of what you might have heard, the "lost decade" of deflation in Japan was not nearly as ugly and painful as the situation that is now unfolding in the US, Japan, and elsewhere.
That would be me. What's your question?? Im also guessing a lot of other folks in this forum as well!!
At its most basic level, capitalism offers people the freedom to choose where they work and what they do … the dignity that comes with profiting from their talent and hard work. … The free-market system also provides the incentives that lead to prosperity -- the incentive to work, to innovate, to save and invest wisely, and to create jobs for others.†-President George W. Bush
In other words, free-market capitalism is the best path to prosperity.
whew! You guys can call it what you want to, but all I know is that its bad. My company just laid off about 30 people, and the ones that didn't get it are afraid to work themselves out of a job. I got moved to a job thats over 30 miles from my house (at least gas is cheap), and now I've got alot to think about on my way to work everyday. We've lost million dollar jobs because the banks pulled out the funding, and "joe bigbucks" can't afford to pay the subs without the bank. Foreclosure signs have been popping up all over my neighborhood, and my Christmas present to the family was a mortgage payment. So you guys can figure out how to best take advantage of the situation by ironizing your assets, but I'm gonna keep my head down, my mouth shut, and work my asset off!
I'm into my 15th month of unemployment without a single job offer (I check every morning starting at 6:30 I forget just how many resumes I've sent out in the last year or so probaly well over 1000)
The only reason we're still current with the mortage payment is I used my retirement savings up. That's just about completely gone!
I feel you brother. I wouldn't be surprised at all if my company goes through another round of lay-offs. Its not really if but when. I've been with the company for almost four years, but I'm on a totally new crew, new job, and new project manager. I'm sure that as of right now, I'm at the top of the list for unemployment. Never mind all the time of given this company, these new people just don't know me and right now just don't really care. The more time I can get before the pink-slips start going out, the better chance I have to prove myself (again).
I network extensively looking for a job (among other things) and those who have worked inconstruction are having it much worse than I ..
A contractor who'd been earning over $200,000 a year for nearly a decade (and spending it as well ;-) has worked for the past year as a bag boy at the local grocery store. They haven't made a house payment in 18 months and the bank won't foreclose on them because if they do that puts them out of trust and they have to close the doors. They send a token payment in every 3 months and according to the bank records the loan is "progressing"
There are many contractors who now work as security guards or over the road truckers etc..
One contractor was "trapped" out in Vegas for 9 months trying to get his equipment released when the bank came and secured the building site.. turned out the developers had claimed the equipment as theirs. The bank was forced to play hard ball due to concerns the fed might step in and close them down. He spent thousands with attorney getting the matter before a court in order to be able to leave..
Well, deflation basically means prices are going down which is good for me. I'm building myself a house right now and the price of steel, along with everything else, has gotten way out of hand. And I noticed plywood is actually becoming semi-affordable again.
yeah, absolutely. The prices of everything are coming down. We will have to get used to our standard of living also dropping.
No question about that. The world has to level out and that doesn't mean every one else's is going to rise to the current U.S. standard. The planet can't possibley support that.
This country no longer produces much that is of value to the rest of the world and has been living on the fumes from the time it did for quite some time now. There is no evidence that the way people have been spending and living high over the last years will ever resume. We will see our standard of living go down as other's rise to meet it somewhere in the middle. That however, is a best case scenario.
There's always some fool that will proclaim America's "greatness" and pretend this isn't the truth but reality has a way enforcing itself.
In the meantime, I'm happy to see prices coming down. Makes my cash go that much further.
One real strength America still has is it is the worlds bread basket.. in addition we lead the world in high tech. Another strength we have is our colleges are among the best in the world..
Well educated people innovative people can create solutions others cannot because we still have many great sources of raw materials.
America appears to be losing it's edge in all the above mentioned areas. Especially education. And food production is finite. The economic world has to flatten out. No question.
admittedly we are losing our edge in precollege education however America is still the university of choice for most of the rest of the world.. There is no doubt that we are the breadbasket of the world. Further most advances in agriculture come from America.
There are countless miracles yet to be found in food production both incrementally and sudden.
America does have problems, we've got stop selecting presidents based on how folksy they are and start selecting them based on how brillant they are.. That's hard in a nation which doesn't have respect for brillance only for money..
So you're saying that our biggest exports are food, jobs, and educated people.
The mark of the immature man is that he wants to die nobly for a cause, while the mark of a mature man is that he wants to live humbly for one. --Wilhelm Stekel
and raw materials
Our (USA) biggest export commodity is electrical machinery.State by state data from the census bureau.http://www.census.gov/foreign-trade/statistics/state/data/index.html
Edited 12/31/2008 7:58 pm ET by CJM
Hmmm.... Minnesota's biggest export is body parts and accessories.
The mark of the immature man is that he wants to die nobly for a cause, while the mark of a mature man is that he wants to live humbly for one. --Wilhelm Stekel
We're losing our high-tech lead pretty quickly.
The mark of the immature man is that he wants to die nobly for a cause, while the mark of a mature man is that he wants to live humbly for one. --Wilhelm Stekel
True, we've experencing significant (if uneven) deflation now -- housing prices down, fuel prices down, building materials dropping as a result, wages under downward pressure, forcing prices of many consumer goods down. Food prices are the one major area where there's been no downward movement.One problem with this scenario is that employers, rather than cutting wages, tend to lay off workers instead. Another problem is that investors sit on their money, since it'll be worth more tomorrow without investing.
The mark of the immature man is that he wants to die nobly for a cause, while the mark of a mature man is that he wants to live humbly for one. --Wilhelm Stekel