Deflation

Deflation, the opposite of inflation, is a situation of falling general prices. Such episodes indicate that dread of deflation stems from its association with unemployment, business failures, and financial stress. Deflation tends to occur in cyclical slumps when collapses in aggregate spending force producers to cut prices continuously in a desperate effort to attract buyers. While these cuts eventually help to revive economic activity, they hardly work instantaneously. In the meantime, output and employment languish.

Absent in much of the recent worry over falling prices is the recognition that deflation is hardly a new topic or a new event. Classical (circa 1750 - 1870) monetary theorists, in particular, had much to say about it. Classicals, of course, abhorred deflation because, when unanticipated, it occasioned arbitrary and unjust redistributions of income and wealth from debtors to creditors. But classicals looked beyond these distributional outcomes involving equal but opposite transfers from losers to gainers to deflation's adverse effects on output and employment. As we will see, classicals attributed such adverse effects to price-wage stickiness; to rising real debt, tax, and cost burdens owing to lags in the adjustment of nominal values of those variables to falling prices; to the hoarding (rather than spending) of cash in anticipation of future deflationary rises in the purchasing power of money; and to other determinants.

Deflation, in other words, is a speedily self-correcting phenomenon that brings its own remedy in the form of monetary expansion through the balance of payments. Deflation is not a bad thing, that is, it has no adverse real effects. It dies because profit margins, the difference between prices and costs, vanish and with them the means and the motive to produce. Output and employment then decline in a self-reinforcing downward spiral. For the same falling prices that combine with rigid cost elements to depress profits also prompt an unloading of stocks of goods. This dumping of goods puts further downward pressure on prices and profits causing still another unloading of stocks, etc. The downward movement continues until stocks are exhausted and the resulting shortage of goods spurs a rise in prices that ends the process at the trough of the cycle.

Pat, I may have to remove the post. I sent in a request to the author of the Deflation Briefing get the link to you guys. It's an economics report and how to survive the deflation of the dollar. The advice was, as comparative monitary values change, the US dollar vs the British pound, generally in a deflation the dollar will gain strength. So, you invest in currencies as they rise and fall against the dollar.

What it said is that the "bailouts" aren't going to do anything because the power of this economic deflation is much too strong for our government to stop it. It gave graphs showing what is being given away and how much is needed. What has been lost in the last year is mindboggling. Gold, and other markets are expected to fall, along with housing values, etc. The author is Martin D. Weiss, Ph.D. of Money and Markets: Free Investment Email Newsletter

It's free to get his newsletter, you sign up at the link above and the deflation briefing is only for this weekend. No money to view it, or to sign up for the newsletter. He has never solicited me in his e-mails to buy anything even though there are products for sale. They have been informational, and everything that he said so for has been correct.

Sorry for the plug on this guy's site, but the information may help us come out on top as our economy reverses.

Dorothy