Deflation is Good for Egos
Funny how the core consumer price index (CPI) does not include basics like food and energy. According to an article posted on AOL November 19, 2008 by the Associated Press, while consumer prices in October fell 1% in general, the CPI fell only 0.1%. We know gasoline prices plummeted – a good thing for those who rely on cars, planes and fuel oil, but a bad thing if you are worried about alternative energy falling down the national priority list.
Unfortunately, there is a bigger “cost” when society “deflates.”
True, cheaper goods and services create economies at a time when we need lower prices most. But when major producers are forced to lower prices and cut back production, when retailers are taking antidepressants in anticipation of a holiday shopping season that many think will fall 18-20% below last year’s levels and when major purchases (houses, cars, appliances) are put on indefinite hold, (stalling assembly lines and new home construction nationwide) the most significant “market” solution to our economic crisis – growth – is taken out of the equation for a sustained period of time. It’s not a switch; it’s a shift… as difficult to stop as braking a runaway freight train. Time just stretches out.
With falling real estate prices, job loss and general deflation – coupled with the need for government intervention at a critical time – the suffering hits states, counties and municipalities particularly hard as their tax base erodes. After all, they can’t just print money like the feds.
Look at California where the meltdown is an “add-on” to a pre-existing condition. They have had to beg, borrow and steal to cover massive budgetary deficits… a snowball effect that began in 2001 when former Governor Gray Davis (yes, he was “recalled”), reacting to a series of power outages that rolled across the state, was snookered into buying energy futures at highly unfavorable terms on the open market, since the California power companies were pretty much insolvent and had no buying power. California agreed to pay $43 billion for power over the next 20 years – and energy prices have fallen significantly since. Add the climate-change-induced perpetual fire season (it used to be four or five months) to the mix, and the fact that California has the second worst housing fall in the U.S. (behind only Nevada) almost gets lost in the shuffle.
In many small to medium-sized municipal jurisdictions, where the local businesses are failing in droves, you have the combined impact of massive unemployment and heavy additional social needs coupled with a loss of taxes from those affected industries. Think what it must be like in Michigan right now. No matter whether there is a rescue plan for the automakers or not, tax revenues to many municipalities and, indeed, to the state itself, are most certainly contracting. There will be less to retrain the unemployed, educate future generations into productive lives, or to take care of the sick, needy and the weak. Other regions gloat, having been relatively spared for whatever reason, and cling to their cash – it is a natural human reaction.
In the end, this deflationary reality is a downward spiral that challenges the new administration. Too much borrowing (especially if those borrowings are not viewed as long-term investments in our future – like energy research, education, infrastructure, etc.) and you get inflation – where money is worth less and goods and services cost more. Or you get the worst of both worlds, no growth with higher prices – stagflation.
The United States is an amalgamation of economic units, many with interests very different from either the “whole” or some of the “parts.” The balancing act that now belongs to the President-Elect is among the most complex challenges ever faced by any American leader – unify the smaller governments into a single vector while still dealing with issues that are uniquely local, rebuild confidence and restore growth, revitalize the credit void and recreate consumer and business markets, stabilize housing prices – and do it will an eroding tax base where too much non-investment borrowing will trigger inflation or stagflation. Add a few international crises that are bound to occur and the possibilities are frightening.
We need to keep working and rebuilding, even though our spirits are constantly being pulled down. Individual efforts can and do aggregate into new and better times. That’s what leadership is all about. We need to believe in ourselves and then work to prove it. The “one true thing”: this is not going to happen in a year or two – time and patience will test our resolve and our commitment to being Americans. Partisanship needs to fade away for a while. It can’t be “my plan” versus “your plan” and mine works better; it has to be “our plan.”
Unfortunately, there is a bigger “cost” when society “deflates.”
True, cheaper goods and services create economies at a time when we need lower prices most. But when major producers are forced to lower prices and cut back production, when retailers are taking antidepressants in anticipation of a holiday shopping season that many think will fall 18-20% below last year’s levels and when major purchases (houses, cars, appliances) are put on indefinite hold, (stalling assembly lines and new home construction nationwide) the most significant “market” solution to our economic crisis – growth – is taken out of the equation for a sustained period of time. It’s not a switch; it’s a shift… as difficult to stop as braking a runaway freight train. Time just stretches out.
With falling real estate prices, job loss and general deflation – coupled with the need for government intervention at a critical time – the suffering hits states, counties and municipalities particularly hard as their tax base erodes. After all, they can’t just print money like the feds.
Look at California where the meltdown is an “add-on” to a pre-existing condition. They have had to beg, borrow and steal to cover massive budgetary deficits… a snowball effect that began in 2001 when former Governor Gray Davis (yes, he was “recalled”), reacting to a series of power outages that rolled across the state, was snookered into buying energy futures at highly unfavorable terms on the open market, since the California power companies were pretty much insolvent and had no buying power. California agreed to pay $43 billion for power over the next 20 years – and energy prices have fallen significantly since. Add the climate-change-induced perpetual fire season (it used to be four or five months) to the mix, and the fact that California has the second worst housing fall in the U.S. (behind only Nevada) almost gets lost in the shuffle.
In many small to medium-sized municipal jurisdictions, where the local businesses are failing in droves, you have the combined impact of massive unemployment and heavy additional social needs coupled with a loss of taxes from those affected industries. Think what it must be like in Michigan right now. No matter whether there is a rescue plan for the automakers or not, tax revenues to many municipalities and, indeed, to the state itself, are most certainly contracting. There will be less to retrain the unemployed, educate future generations into productive lives, or to take care of the sick, needy and the weak. Other regions gloat, having been relatively spared for whatever reason, and cling to their cash – it is a natural human reaction.
In the end, this deflationary reality is a downward spiral that challenges the new administration. Too much borrowing (especially if those borrowings are not viewed as long-term investments in our future – like energy research, education, infrastructure, etc.) and you get inflation – where money is worth less and goods and services cost more. Or you get the worst of both worlds, no growth with higher prices – stagflation.
The United States is an amalgamation of economic units, many with interests very different from either the “whole” or some of the “parts.” The balancing act that now belongs to the President-Elect is among the most complex challenges ever faced by any American leader – unify the smaller governments into a single vector while still dealing with issues that are uniquely local, rebuild confidence and restore growth, revitalize the credit void and recreate consumer and business markets, stabilize housing prices – and do it will an eroding tax base where too much non-investment borrowing will trigger inflation or stagflation. Add a few international crises that are bound to occur and the possibilities are frightening.
We need to keep working and rebuilding, even though our spirits are constantly being pulled down. Individual efforts can and do aggregate into new and better times. That’s what leadership is all about. We need to believe in ourselves and then work to prove it. The “one true thing”: this is not going to happen in a year or two – time and patience will test our resolve and our commitment to being Americans. Partisanship needs to fade away for a while. It can’t be “my plan” versus “your plan” and mine works better; it has to be “our plan.”
I’m Peter Dekom, and I approve this message.
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2 comments:
When Rome is burning, WHAT DO YOU DO? You create a new empire. The problem right now is it is not just Rome that is burning.
Economic
Governmental; Visigoths and Vandals who, even as we speak, cry for letting the markets float freely.... like deregulation is the answer, not the problem...
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