What’s This?

Kanook – Tlingit Nation

March – 2010

There are some who are worried about it! The economic indication where your
dollar instead of buying a slice of bread is able to buy two - isn’t that what deflation
is, in a simple analysis? Whereas the experts tell us that “deflation” is a decrease in
the general price level of goods and service, that happens when the annual inflation
rate falls below 0%, (i.e. a negative inflation rate), the result being an increase in
the real value of money – where it allows the person holding the money to purchase
“more” goods with the same amount of money.
Now “don’t” confuse this with “disinflation”, which is a slow-down in the inflation
rate (i.e. when inflation decreases, but still remains positive). We all (at least of
some of us on this planet) understand that inflation reduces the “real value” of
money over time, and it should be known that deflation increases the “real value”
of money over time.
Albeit the short-term effects of inflation are usually immediately, there are little
short-term effects of deflation, especially in real-estate as in southern California,
where in the land of make-believe it seems the price of land and the castles on it
never seen to depreciate – look forward to a crash in real-estate prices there only if
two things occur, 1) a devastating earthquake, and 2) Mexico declares war on it.
There is one long-term effect of deflation that bothers some experts, and some
holders of debt, which is what is known as a deflationary spiral…this happens when
decreases in the price of an item holds or continues to spiral downwards, whereas
the demand for the item(s) continue to go down along with their value. This
eventually will lead to lower production, leading to lower wages, whereas the
workers can no longer afford the item(s), and the cycle continues to move
downward and then we are experiencing what is known as a deflationary spiral’s
vicious circle. Today’s talking heads tell us that the idea of a deflationary spiral
actually occurring is an idea from the past, as the number of us walking around the
planet has exploded with all having diverse occupations, which shoots the idea in
the foot about being a massive walk-away from any particular product – in other
words, there will always be someone who will buy a pink Cadillac, so don’t sweat it.
The “Great Depression” was considered a deflationary spiral by some, by others,
just another rush to get away from a splash-over from the speculators in the Stock
world. There are some who believe that “excessive” debt can bring on deflation,
which if you looked around you the whole frickin world is walking about with pockets
full of IOUs.
 Historically in the land-of-the-buck, deflation has been associated with the supply
of goods going up, without an increase in the supply of money, some equate this to
what happened in Japan in the early 1990s, this eventually leads to the demand for
goods going down, as you and I no longer have any money to make a purchase – no
matter the cost!
A condition our world suffered in the past, which more than many believe cannot
happen today in the land of liberals, is during the Great Depression when a
response to increased demand were there, the Federal Reserve clamped down and
decreased the supply of money, thereby contributing to deflation…the experts scoff
at this today, as we have more green stuff floating around than the deck chairs
from the Titanic.
Today in our world of “now”, the larger concern is a credit-based deflationary
spiral where the central bank slaps higher interest rates across the board, which will
pop the “asset bubble” or the collapse of a command economy – which has been
run at a higher-level of production, than in reality it could actually support. In our
present economy the value of “credit” would spiral up, whereas to borrow a dollar
you’d see the cost of doing so go through the roof, I remember not too long ago (20
years or less) when the interest rate on a home-loan was bouncing around 18-20%,
this was a direct result on the inflation that was occurring in California and the
upward spiral value of a home was climbing out-of-sight, a condition that now led to
our make-a-loan to anyone economy that came down around our ears during
2007/2008. As the tight credit condition spreads and the demand goes down, the
price of goods and services soon follows, business big and small set their prices
lower and lower, and some soon find themselves laying off their work force and
even liquidating their operation – and then if they sell their assets (produced goods)
this further floods the market with cheap goods, whereas Banks now own assets
that have lost their value and as the demand goes down – the spiral slips into the
basement and now we have some serious deflation.
To slow or stop the deflationary spiral banks will often withhold collecting on non-
performing loans (as happened in Japan) whereas at “best” it was a stop-gap
measure, because they now must restrict credit as they have no “real” money to
lend, which further reduces the demand – and then you’re back into the no money
syndrome .
Deflation can produce bartering if it continues for the long-term, whereas you find
the “official” money becoming scarce (or unreliable) bartering allows the
continuance of commerce – if it becomes that the central government is unable,
even if willing, to adequately control the countries internal economy, the individual
is forced to barter, that is “except” for imported goods or services – which in today’s
economy we find internal economies depending more and more on goods and
services outside of their borders…because of this condition or set of circumstances
the idea of a hard-hit deflation is a distant possibility. Where barter acts as a poke
in the pocketbook to encourage the consumption of local products, we now find the
nations of the world in not so much being fully dependant on their own local
production – spreading their buying habits across the globe. A couple of decades
ago, for instance the USA could exist primarily on its own, where today the
companies in America have spread their operations in search of less expensive
labor markets, the country now depends on its overseas partnerships to survive…
and barter is out of the question. This holds true for the individual as much as it
does for the multinational corporations.
A great many of the economic experts believe that “deflation” will cure itself,
because as the prices decease, demand would “naturally” increase and the
economic network would self-correct.
This view was seriously challenged in the 1930s where some economists argue
that the monetary system was not self-correcting with respect to deflation and
those governments and central banks had to take effective measures to boost
demand through “Tax Cuts” or increases in government spending...i.e. the 2 nd World
War.
As for the onset of lower interest rates, some feel (with good reason) this has
encouraged higher asset prices and excessive debt accumulation – whereas the
lowering of the rates are now proving to be a temporary move (solution) leading the
world economy into a future debt deflation crisis, in other words we have a bit too
much credit-based greenbacks floating around, in turn not doing what some figured
would happen and that is the reduction of prices and assets.
This is causing a concern among economists and individuals that a deflationary
spiral is on its way, and not too far down the pike. While others believe that the
position of global interdependence is large enough that it will absorb the lack of
demand and the excess of the credit-based monetary supply and that the economy
will self-correct. The past events of the failure of the financial institutions because
of their flaky loan practices has more than just a few on-edge, whereas Iceland’s
population (93%) voted down a resolution to pay back $5.2 billion it borrowed from
the UK and the Netherlands. And in the USA’s block of borrowing money from the
Federal Reserve and issuing US Treasury Bonds to secure the borrowed money, we
now find the biggest purchaser, China, shying away from scooping them up.
Strange isn’t it, here we have the American public that is so quick to cast stones at
the Chinese, having to prepare themselves for a credit crunch because the Chinese
no longer are rushing to the trough to scoop up our Treasury Bonds, which in the
long run will increase the chances of less greenbacks on the street in America, yet it
is evident that an internal barter system will not function simply because a larger
percentage of our goods and services are outside of our borders.
They call this caught between a “rock and a hard place”, do I think deflation is a
thing to worry about? No! There may be a short-term spike, but in the long-term it
will not materialize – but then again I’m not a certified economist with more degrees
than a thermometer.