What is Deflation and Why Do I Care?

In the 1980s, I noticed from the 1960s to 1985, the expansions in the economy were getting weaker and the contractions were getting stronger. By 1984, the hyper inflation days were declining. I started thinking that the world was going into a deflationary period and it was time to prepare for that. To let you know how naive I am, I went to my local government, “The City of Harrisburg, Pa” in 2003 and told the 2003 City Council to start paying off as much debt as they could because times for City governments was about to get tough. They gave me the usual diplomacy but privately they where saying, “Here comes the nut!”

So what is deflation?

Dictionary.com says that Deflation is, “a general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.”

Investopedia goes on to say, “declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. To counter deflation, the Federal Reserve (the Fed) can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because businesses increase profits and take some of the depressive pressures off wages and debtors of every kind.”

Does any of that sound familiar?

Business has been closing factories in this country for the past 35 years and moving them to the Far East. That is how they have been able to increase profits. Have you seen increasing unemployment in the past 10 years? The true unemployment among all workers and people wanting to work has been rising since 1970.

Have you experience lower wages and benefits in the past 10 years? I noticed that my contributions to my health insurance have gone up since 1982 and my coverage has gone down. You can’t watch the news without them telling you the high number of defaults in housing. I started noticing the homeless living in the streets in 1982. Now the homeless problem is in the news all of the time. But I do see more “out of business” sales now and “buy one get one free” deals. You might know by now that we are in a major depression.

The Obama Administration, congress, and the Federal Reserve is trying to increase the money supply and deliberately induce rising prices, causing inflation. That is why banks are giving big business loans with less than 1% interest and we see one bailout after another. You might say that will cause inflation like we had in the 1970s and early 1980s. Yes it will but at least we will be working and buying things that we need like food and housing.

We will look at Inflation next time….