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Deflation can lead to a scary scenario
dictionary definition of deflation
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Kai Ryssdal: If you think consumers are having a hard time with deflation, imagine how businesses feel. Virtually all of them depend on credit. Tumbling consumer prices and less money out there to lend in the first place add up to a pretty scary scenario, as Marketplace's Jeremy Hobson reports from New York.
Jeremy Hobson: Things are moving fast in the credit markets. Take it from Guy Lebas, chief fixed income strategist at Janney Montgomery Scott.
Guy Lebas: When we were seeing oil prices at record highs back in July, deflation was a very, very distant worry. Now it's become kind of front burner.
As debt becomes more expensive, companies don't want to borrow as much, especially when deflation is driving down their income. Martin Wolfson is an economist at Notre Dame. He says remember what happened to borrowers when deflation hit home values.
Martin Wolfson: So, as they are unable to pay their debts, they default. This means losses at the banking system. The banks contract or are unwilling to lend. This slows down the real economy.
Now, imagine that happening at businesses across the country. Think about what that would do to the economy. Irving Fisher wrote about this very problem back in 1933. He was a Yale Economist who warned about what he called debt deflation. Here's a dramatization.
Actor: Unless some counteracting cause comes along to prevent the fall in price level, such a depression as that of the 1929 to 33 tends to continue, going deeper, in a vicious spiral, for many years. There is then no tendency of the boat to stop tipping until it has capsized.
Now, Fisher added, there is a way to right the ship -- reflation, in other words, printing more money. When Fed Chairman Ben Bernanke mused about the possibility of a deflationary spiral back in 2002, he said doing so [helicopter noise] amounted to dropping sacks of cash from helicopters to stop it.
In New York, I'm Jeremy Hobson for Marketplace.
Ryssdal: That was Rico Gagliano there for that dramatization. Never passes up an opportunity, does he.
Maybe this will finally encourage Americans to start saving again. When your money is constantly losing value, you might as well just spend it, right?
Periods of deflation aren't so bad if you live relatively debt-free and have some savings. I'd rather have a mix of inflation and deflation that maintains a fairly constant value of money than see inflation year after year.
Big corporations with big piles of debt deserve to face the same consequences as individuals who can't live within their means. Let them burn so a smarter new generation of businesses can take their place. Propping up the failed companies drowning in their own debt will only hurt our economy in the long run.
Some types of deflation are good. For example, the cost of compute power over the years has been consistently deflating. We've even created a name for this phenomena: Moore's Law.
Yet despite this constant deflation, the market for computers has consistently increased. Explain to me again, why deflation is necessarily bad?
Between the stock market, job losses and the real estate slump most consumers have had the socks scared off them.
But, everything I read seems to make the point "Gee, if the consumer would just start spending again everything would be fine".
I don't think so. The consumer has kept this economy afloat for years on credit cards and home "equity" loans.
However, that party is over even if nobody told AIG. Until prices fall and real wages rise the consumer is not going to be able to do anything but hunker down and try to pay their bills.
So, yeah, Deflation may sound scary to Economists but to the average consumer, falling prices may be the only good news they see in the marketplace...
