We spend our time fighting inflation, so why is deflation so bad?
Michael E. Kanell, economics reporter for The Atlanta Journal-Constitution, says that lower prices don’t hurt you – unless, of course, you own a home, have a job that could go away, own a business etc.
Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University in Atlanta, points out that deflation is a real threat. “Deflation is more of a danger now than it was six months ago,” Dhawan was quoted as saying in Kanell’s May 30, 2010, article.
Dhawan points out that it’s easier to shop during a period of inflation. Buy that TV now, lest the price goes up tomorrow. But deflation can be as big a drag on the economy as inflation.
We all love lower prices on everything from TVs to homes. But if you have a job, it could go away as your employer cuts back because of lower prices. Then, as you have debt, the lower interest rates help, but if you don’t have a way to generate income, it’s tough to pay down that debt. Also, if you own a home, and the value of that home keeps dropping, you are suddenly worth less – never mind if you have an upside-down mortgage and paying off a debt that is worth more than your actual house.
INFLATION STILL ON THE FED’S RADAR
The Federal Reserve still has its eye on inflation, but deflation is not a good alternative. As Kanell points out, we love a good soaking rain after a long drought. We love to see prices drop in hard times. But just as too much of that soaking rain can lead to flooding, a steep price drop can cause more job losses, even lower housing values and other hardships for struggling families. As families struggle, they buy less, businesses cut back and the cycle continues.
In recent decades, an ever-expanding Japanese economy led that country’s economic bubble to burst, and deflation set in. In 2001, Kanell points out, the Federal Reserve feared the U.S. was turning Japanese as the inflation rate here sunk lower. But, prices ultimately stabilized and the U.S. economy expanded.
We are not in a deflationary period now, as the Consumer Price Index rose 2.2 percent in the past year. But too-low prices can be almost as harmful as too-high prices. We fear now that government is going to raise taxes to compensate for the losses it is taking in this downturn.
So if you have a secure job, a good business and are flush with cash, this is a great time. Knock down some of the debt you have, pick up the TV, home, car or whatever you need or want. Things can’t get much cheaper. Then, hope that the economy turns before things sink too low.
Chances are, if you’ve saved well and invested well over the years, you’ll weather this storm and ultimately succeed when things pick up. Just when things will pick up is anyone’s guess. If you don’t have much behind you, it’s not a great time to buy that big-ticket item. Taking on debt that is difficult to pay back will ultimately hurt you when inflation comes back.
So, keep buying what you can afford. Keep spending what you can, while also saving. Find the right economic balance for you. The economy is largely about balance and ours – our personal economy and the nation’s — will improve if the balance is right.
Peter
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