Tuesday, January 20, 2015

It's 2009 all over again.

A lot of people are talking about deflation now in a stupid way. Which I will explain later.

For the past few weeks/months when I read about people talking about deflation - the thing that scares me the most is they never seem to talk about the 2007-2010 time range.

When they write articles or when I see interviews, they talk about this crazy new confusing "thing" called deflation that we haven't seen since the Great Depression.  Which makes my brain go wild, because I vividly remember the deflation of 2008-2010. I own property. It's like they don't even recognise that period as a deflationary period.

This has actually caused quite a few conversations in the Snarkolepsy household. It makes my eyes grow wide because I don't understand how no one connects what we soon face with the closest example on record.

Home prices were down 40% or so. Wages went down. Food prices went down. But no one talks about it. It makes me so crazy I had to start plugging things into Google to make sure my memory wasn't failing me. Which is where I found this article that really gave me a sinking feeling in my stomach.

Deflation warning bells ring louder.

This is not from my blog earlier this summer, or even from this year. It's from 2009!

"NEW YORK (CNNMoney.com) -- Prices are falling for just about everything these days.

The government will report its key inflation index Friday morning, the Consumer Price Index, and economists believe the report is likely to show the first year-over-year drop in prices since 1955.

But while shoppers might see that as good news, economists generally view this as a threat to an already struggling economy.

That's because deflation, or a widespread drop in prices, is one of the most destructive forces that can hit an economy." 

The article goes on to say:

"Deflation is most often associated with the Great Depression. In 1930, consumer prices fell 2.3% and plunged 9% a year later. Prices fell nearly 10% in 1932 before the rate of decline started to slow. Still, prices didn't turn higher again until 1934.

The U.S. is nowhere close to that type of deflationary spiral just yet. Economists forecast that the year-over-year drop in January was just 0.1%

Much of that decline has been driven by lower gas prices. But there is clear evidence that falling prices are spreading beyond the pump. The core CPI, which strips out food and energy prices, fell at a compounded annual rate of 0.3% in the fourth quarter of 2008. "

Still further down in the article:

"Worries grow about more salary cuts

The potential economic pain that can be caused by deflation is so great that St. Louis Federal Reserve President James Bullard identified it in a speech Tuesday as the greatest risk facing the economy this year.

"I think we face some risk -- at this point only a risk -- of sustained deflation," he said, adding that "ongoing deflation in the United States might be particularly pernicious."

"I think we're on the precipice of outright, full-blown deflation and that we'll fall into that abyss by this summer," said Mark Zandi, chief economist for Moody's Economy.com. "Given the pressures businesses are under to sell something, they'll have to cut prices and I think they will."
Read the whole article here.

It's irritating to see business people questioning whether deflation will hit the US. Since summer I've been saying that if higher gas prices cause inflation, what do lower gas prices cause? Deflation.

OF course this is going to hit the US. This article shows you exactly why people who have been trumpeting lower gas prices as a savior to the US economy don't really understand deflation. Lower gas prices didn't make one bit of difference in 2009. The circumstances aren't exactly apples to apples since there aren't quite as many people underwater in their houses. So we will see how things go I guess.

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