Will deflation hit the nation? (Aug. 28)
By Chuck Doud
The Madera Tribune
We have been reading and hearing a lot lately about the fear of deflation — and I don’t mean a flat tire.
For years — for the lifetimes of most of those now living — prices and wages have been going up. If they go up without a commensurate increase in productivity, that is inflation, and the result of inflation is that money becomes gradually worth less over time.
When deflation occurs, prices and wages go the other way. Prices go down and wages go down — but the value of money, almost miraculously goes up.
Although the idea of deflation scares the Armani underwear off the big money people on Wall street, a little bit of deflation might do some good on Main Street.
Wall Street investors like the companies in which they own stock to raise their prices. When they do, profits go up, at least until inflation catches up with the increases. That is called the inflationary spiral. When prices go up, people want higher wages, and when they get them, prices go up again, and there you go.
But on Main Street, when prices go down — and that doesn’t happen too much any more — then local people are more likely to flock to local stores, because their dollars will be worth more.
You might ask, “How can they do that if wages go down, too?” Well, that’s because of the deflationary spiral. It is easier for companies to drop their prices in response to competition than it is for small firms to quickly drop their wages. Wages would first have to stabilize, and then fall gradually.
But in both cases, the value of the dollar would rise.
According to some economists, Japan is experiencing a minor deflation.
In the U.S., we are seeing a deflation in housing prices, both for used houses and new. There are other signs of deflation, too. If they continue, this could be an interesting time.
