Worried About Inflation? Think Deflation

handmark_logoWhile perusing my Pocket Express by Handmark the other day I came across Scott Burns’ article concering the future of our economy titled High Debt Means Deflation, Not Inflation.  It’s worth the time to jump on over and read.

Interestingly enough it seems to be a growing train of thought as not too long ago I read something of a similar vain in I think the Wall Street Journal.  (Can’t remember as I read all the time.)  I just remember the author talking about how we are basically resetting our economy.  A re-boot if you will.  That good times won’t come back simply just because Bush and Obama want it to and pour literally trillions and trillions of dollars into a bucket wherein they hope a stimulus will be born.

The most interesting item from the Burns article:

“When you have major debt events, it changes our behavior for a long time. We’ve had a record decline in wealth. But the income effects are far larger. Payrolls have seen the largest drop since 1948. We’re at a six-decade low in factory utilization. The output gap (the difference between what we could produce and what we are actually producing) is the largest in history.”

That means rising demand, if it occurs, won’t cause rising prices.

6 Comments

Filed under Social Issues

6 responses to “Worried About Inflation? Think Deflation

  1. I strongly agree with your opinion, informative and useful.

  2. Another Investor

    If the United States were an isolated entity, I would agree. The trouble is, while demand will decrease here because of the debt “event,” it will not decrease in the rest of the world. In addition, the yields on our debt purchased by others (China) will have to increase, as the debt buyers choose among alternative investments and deal with rising inflation in the rest of the world.

    The likely result is the cost of everything will rise and we will be less able to borrow to pay for it. The living standard here will decline, as the rest of the world maintains or increases its standard of living at our expense.

    Burns is correct to conclude our behavior will change. However, it will not result in deflation, but rather a lower standard of living.

  3. Mary Ann – Thank you for reading. I’m not sure it’s my opinion. I’m just noting a growing trend amongst economist.

    AI – You may be right. Or they may be right. Or… With so many differing opinions we have to assume we are in somewhat unchartered economic waters. There are indicators this direction and that. The one thing I’m sure of is that changing our mindset from heavily leveraged consumer debt to having only what you can truly afford can only be a good thing.

  4. Another Investor

    The problem with reduction in consumption to what we can afford is that our economy is now largely comprised of debt funded consumer consumption. Reduction in consumption means fewer jobs and even less consumption. A downward spiral in consumption in this country is the basis of the deflationists’ conclusion.

    In the 1930’s, the rest of the world except Europe consumed nothing compared to us. Their economies had little to do with us or Europe except as sources of raw materials. Deflation occurred because there was dramatically decreased demand for raw materials and finished goods in the developed world.

    Today these economies are rapidly growing consumer economies. The standard of living is rising and billions of people are catapulting into their version of middle class. The market and the demand for goods and services is shifting from us to them. We will become increasingly irrelevant as their economies thrive.

    Unless we can retake the lead in producing goods and services the rest of the world wants, we will lose our economic and political position in the world. We will face stagflation or worse, when we have little to sell and no one will buy our debt.

  5. Your last paragraph is inevitable. I believe fully that the 20th Century was the American Century. But I simply do not believe that will be the case for the 21st. The rise of China, India (with their population bases) and others will simply pass America’s economy.

  6. Another Investor

    Having grown up in the rarefied atmosphere of academia, I pay more attention to what investors do than to what economists say. Jim Rogers has been moving away from dollar denominated assets and towards commodities for years. Now Bill Gross from Pimco is suggesting diversifying away from the dollar.

    I thought about buying farmland about 5 or 6 years ago. Looks like I should have done it, based on the appreciation. Food production to meet the world’s middle class demands will probably be one area in which we continue to dominate.

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