Falling Prices Raising The Fear Of Deflation

With the stock market crumbling and the economy shrinking, a whiff of deflation is in the air.

Oil prices yesterday slid below $50 a barrel to the lowest level since May 2005; stores are advertising sales on the eve of what should be peak holiday shopping season; and worldwide demand for items as varied as steel, petrochemicals and clothing plunged in October.

Read the whole story here.

Comments

[letsbepeaceful]

Although there are a lot of people out of jobs and many heading for foreclosure, there are also a LOT of us who are well set for jobs, comfortable in housing and with low debt. However, nobody is spending anything, even those who are financially ok.

I have plenty in the bank, a decent fixed mortgage rate, and a car loan at 0%. I have everything I need. I don't need new appliances, another car, a new TV, etc. Just food and utilities for the while. Although it is extremely unlikely that my job will disappear, I'm still being modest in spending.

I've read that 70% of our economy is based on spending - which seems to be a large part of the problem. it seems to me that eventually families have enough houses, enough TV's, computers, etc., and the fact that people have 'enough' of the big ticket items (and therefore have stopped buying) is ignored by the financial gurus. A friend who's a financial adviser says it's a crisis of confidence and nobody will buy until things stabilize.

[KillTheMessenger]

Same here.

I am financially OK. I have cash. But I don't need anything. What should I do? Go out and buy more stuff I don't need that I then have to carry to the city dump or try to give away at a "yard sale"?

My home is full with things I will never need. They are things I like but I have enough of them. And millions of people have even more "stuff" than I do.

It's not even a confidence crisis. I don't care how the stock market is doing because I am not holding more than a trivial amount of stock right now. My job is so safe that sometimes I have to think about quitting just to mix things up a bit. And, yet, I DO NOT NEED MORE STUFF.

I hope some retailer reads that before opening another store in a new mall.

[1rewd1]

Deflation?

No, it's a necessary price correction. Just like the housing market had become overvalued, so too have the prices on many things across the board.

Unless you're dealing with debt it's not a problem.

Everything is just coming back into line.

[schoolmaster]

I agree. It is time that people who struggle on a regular basis have substantial relief. People who think that deflation is setting in must be getting overpaid, and salary and income structure may need to be adjusted for long term stability.

[sposton]

We were a fundamentally sick economy before the meltdown. A country in which a president urges its people to go shopping is a clear indication of an economy with wrong priorities. It seems to me that all proposed solutions completely ignore this fact and just want to bring back the conditions prior to the meltdown. The problem is deeper and our solutions ought to reflect the nature of our problem.

[dadw5boys]

IF OIL PRICES START RUNNING UP IN JANUARY WE WILL KNOW THAT THERE IS COLLUSION

BETWEEN THE BUSH ADMINSTRATION AND OPEC TO CONTROL THE U.S. ECONOMY !!!!!!

[funkalicious]

How do you reconcile the huge dislocation in markets and the 65% drop in oil prices.. as the liquidation of all asset classes and the short squeeze in the US dollar.... look for runaway dollar creation to continue when we begin pushing on that string it is going to cause hell on earth in America. when they get to the end of this long tail and it snaps back oil is going to shoot back up too many dollars chasing too few goods.

Is this all a Bush conspiracy or are we just run by a confederacy of dunces??

[drkazmd65]

"Is this all a Bush conspiracy or are we just run by a confederacy of dunces??"

Some of both would be my guess funka.

[WorkingClass]

The right wing war on jobs and wages is almost over. Soon the economy will grind to a halt and the entire working class will be destitute. Neither inflation nor deflation has any meaning when you HAVE NO MONEY.

[MetalCanuck]

The main problem is this Debt monetary system that has to end, its crooked and distorts market pricing. Raises don't count because the inflation monster eats it up before you get it.

[MetalCanuck]

Well we need lower prices because a huge segment of the population hsa been priced out of existance. But I am afraid this will not last because companies will simply stock and produce less which will eventually stop the fall in prices on everything. Then there will be increases..

[BRlongview]

I like the quote at the end of this article...

"people were holding back on buying goods today 'not in order to spend tomorrow, but because they're worried about having a job tomorrow.'"

Cause that's exactly how i feel.

This economic downturn is going to be very painful for a lot of people, but it's been a long time coming, and i think an optimist might be able to see these times as the birthing pains of a healthier sense of national community. I'm glad we're generally consuming less. The upside is that we'll get to re-evaluate what we "need" vs. what we "think we want", and hopefully we'll begin to focus on helping our neighbors instead of simply complaining about their annoying habits.

[MsMargaret]

Now that anyone who's income is directly or indirectly derived from American automakers have no reason to feel confident, Congress and the Feds will be scratching their heads and trying to come up with an economic stimulus package that'll get people to spend.

[chasingsol]

People think prices dropping is a good thing... it is for consumers, but not for businesses who must produce goods with smaller and smaller margins. Something eventually breaks.

There is no doubt that we are in a recession, that much is certain. I want to give you something to think about. The following is a list of things that have gone wrong:

Debt liquidation and distress selling. Contraction of the money supply as bank loans are paid off. A fall in the level of asset prices. A still greater fall in the net worths of business, precipitating bankruptcies. A fall in profits. A reduction in output, in trade and in employment. Pessimism and loss of confidence. Hoarding of money. A fall in nominal interest rates and a rise in deflation adjusted interest rates.

Sounds like what is happening now doesn't it, for the most part? Except, it's taken from the Wikipedia article for the Great Depression.

Hold on folks, it's going to get much worse yet.

[Haditup2here]

If pricesand cost were inflated to 5% of their value, wouldn't they go back to the same cost if they deflated that same percentage. Besides, I thought the cost of food increased due to the price of oil with some food shortage due to natural disasters across the county. This is a crock of #$%@.

[VivaZapata]

Where are the grownups?

[marijam]

The most important deflationary asset has already tanked, housing, so what if other prices begin falling? Other prices need to fall to come in line with the lower oil and other commodity prices.

[Carolab]

This is only a short-term fix, to aid the retailers and clear out some housing stock. But who's got the money to spent on discretionary items and buy houses that are more expensive than the one they are in?

People who already have money are the only ones who can capitalize on this. And then what?

Bernanke thinks the solution to the Great Depression was to "throw money at it". But the banks aren't lending and people are losing their jobs. Without investment and jobs growth, what can this possibly achieve?

I read that the banks do have money and are just hoarding what they are getting now to "invest" in more banks--leading to further consolidation; i.e., "too big to fail". I also read they are giving out commercial loans--interesting. If the idea is to create more jobs then great but my concern is are the right businesses getting the money? Thom Hartmann said on today's show that under some of Paulson's and Bernancke's "programs", businesses are temporarily reorganizing as "banks" in order to qualify for bailout funds.

Clearly, these guys are the foxes in the hen house and no one is keeping guard.

http://www.alternet.org/story/107340/

[axt113]

The problem with deflation is that in the short run things are sticky, wages for instance aren't easy to adjust, especially if you eventually reach that price floor of the minimum wage, so as a result companies see their profits diminish or even go into the red, this leads to layoffs, which lead to even less consumpton and even more falling prices, it can create a vicious cycle that drags the economy into a depression

[tililek]

Government officials certainly panic easily and quickly. Todays panic indicates that these individuals forget the panic they felt yesterday. I see no problem with things costing less as I have less money to spend.

[KillTheMessenger]

The problem is that many retailers will have to sell at a price that does not cover their cost and that is going to shut down a lot of businesses. But one needs to take a good look at the merchandise of these businesses first and then ask if we ever needed them. And that is where the Fed goes wrong. By trying to keep the economic balance where it was, they are cementing a non-functional economic model. Over the short term that can be successful but over the long term reality will bust their efforts and the world economy will, may we like it or not, assume a new, and most likely more efficient equilibrium. The Fed will mismanage the situation until reality sinks in and we reorganize structurally.