Inflation is probably familiar to everyone here. Your wages keep going up, but so do prices, and in the end your dollars buy less and less.

Very few of us, if any, have experienced deflation. This is just the opposite: your wages keep going down, prices go down, and in the end your dollars buy a lot more.

With inflation, if you take out a loan, you pay back with dollars of less value. With deflation, the opposite is true--you pay back with dollars of more value.

Is deflation more damaging than inflation? Consider how our economy depends a great deal on lending money to both consumers and businesses.

You must watch the McLaughlin Report also. Yes, it is more harmful than moderate inflation. It devalues physical assets and inhibits investments.

Then I must be in a very odd situation

My wages have been going up, prices going down(aka interest rates), so I guess my dollar buys a whole lot more.

Only if you're one of those people who thinks credit is the same as cash, to be spent with equal abandon.

Of course most would consider a home mortgage as a proper use of credit, also most Americans are burdened with auto loans. Low inflation is a positive (though the causes of low inflation may not be). Deflation is a negative.

Platypus,



Don't forget retail. A general practice in retail is to take out a bank loan to build inventory, such as outdoor furniture sets during this part of the season, with the expectation of selling a bunch for a good profit at the start of the sale season. Then, as the season progresses, the price is generally discounted to move the product, cover the loan, and hopefully make a profit.

With deflation, the retail store will need to buy inventory with cash because paying back with higher value dollars doesn't make business sense. Meanwhile, the customers know that prices will drop, so they hang onto their cash until it seems like the best deal is around. In the worst case, the customers have no dollars, and so no purchase is ever done.

Now consider investment. If you have a large sum of money, you know that just sitting on that money will raise its value. Hey, just stick it into federally insured banks! Or buy up a bunch of Treasury bonds and bills. Just sit on it. Don't invest.

That leads to business failures, more unemployment, and a huge spiral downward. In other, direct terms, a depression complete with soup lines, movements to the far left (redistribution of wealth), and likely another New Deal round of job creation programs.

So what are we doing? Encouraging people to hang onto their money with tax cuts, that's what! Yep, and raising the national deficit while raising the ceiling on federal debt. This is like dumping fuel oil on a wildfire from those tanker planes.

Sleeper, better save your bucks. Income during a period of deflation has a tendency to dry up quickly.

If this goes on through the coming year, the character of the 2004 elections will be highly impacted. All the strategizing that's going on now will be moot. Guns won't matter; butter will.

I said interest rates because that is the one thing that is noticeably down. Some prices are still considered higher.

And if you can buy something at 0%, that credit is the exact same thing as cash.


Edit: Just to add AM. Since my performance is directly related to the income I make, I don't have any fears of that income diminishing. It's amazing what drive and determination can do for you.

Sleeper,

Sounds like you're in marketing and/or sales. What happens when even zero percent interest doesn't attract customers?

You see, with inflation, the customers are still there. With deflation, they tend to not purchase anything but survival stuff, and if the customers are long-term unemployed, then not even that.

I understand drive and determination. That's why I'm working on my third book, the first two cranked out in 18 months. This one I think I can finish in three months, depending on how busy I get on other projects. Yet sales are slow due to the rotten economy. People aren't buying as many books, and so my income takes a hit. As a result, my spending has also gone way down.

I wonder what the Fed is thinking these days. If lowering interest rates avoids inflation, does raising them avoid deflation? I'm not quite seeing how that would work.

This will be interesting from an economist's point of view. This country hasn't dealt with deflation for seventy some years. The economists from back then are either dead or retired, except for maybe Greenspan.

The deflation of the 30's was a result of a shrinking money supply. Want to avoid deflation? Simple solution: print more money.