10 January 2011

Inflation vs. Deflation Debate: What's It Gonna Be?

For years now a debate has been raging within the financial community: What does the future hold raging inflation or deflation? Economists and other “experts” have been absolutely rabid about their points of view. And, for just as long I have argued it isn’t going to be an either or scenario. There will be inflation as regards the things that you need and deflation in the things you can do without.

What got me to thinking about all this was a recent effort by a financial planning firm to get my business. None other than the firm’s principal was making the pitch and was going to personally manage my account. The fellow has been on the cover of several magazines and well regarded in his industry. I was flattered. But, he bombarded me with the prevailing line of thinking that deflation is the big bugaboo. He repeatedly sited the real estate collapse to prove his point. He also lost me as a client.

So what is inflation or deflation anyway? The definition of inflation is “the overall general upward price movement of goods and services in an economy (often caused by a increase in the supply of money), usually as measured by the Consumer Price Index and the Producer Price Index. Over time, as the cost of goods and services increase, the value of a dollar is going to fall because a person won't be able to purchase as much with that dollar as he/she previously could. While the annual rate of inflation has fluctuated greatly over the last half century, ranging from nearly zero inflation to 23% inflation, the Fed actively tries to maintain a specific rate of inflation, which is usually 2-3% but can vary depending on circumstances.” I swiped this definition from Investor Words.Com. As you might imagine deflation is just the opposite.

Unless you have been living under a rock you know that Ben Bernanke, successor to the maestro Alan Greenspan, is melting the presses printing dollars to fight the dread deflation. Bernanke has been literally flooding the world with greenbacks in historic proportions. And, he’s been doing all of this for you, my fellow Americans. If you believe that heaven help you.

The Federal Reserve is nothing but a tool for the people who really run things, the big corporations and other powerful people. Corporations and the fat cats at the top are interested only in profits. It’s tough to make a buck in a deflationary climate because nobody’s buying. If nobody is buying prices just keep on falling.

But, here’s the thing, real estate is always cited as the canary in the coal mine because it effects so many businesses. If houses aren’t selling neither is all the stuff that goes with them; appliances, flat screen TV’s furniture and the list goes on ad infinitum. These associated companies, and they comprise a huge part of the economy, can’t turn a profit. That is unacceptable.

Bush, another tool, came out with the idea that every American should own a home. Why? Well, I can assure it wasn’t because he gave a fig about the people. If he had he would have never been a part of such an absurdly foolish scheme. A scheme which has subsequently led to an awful lot of pain and suffering for those that bought into the idea that they could happily move into a $500,000 home, with no down payment on a $50,000 a year income. Well, they moved in but now most must move out and the overhang of foreclosed properties is weighing heavy on prices. According to this Yahoo article it will be decades before prices return to the former highs. The joke in the mortgage broker industry was “If you can fog a mirror you can get a loan”. I’m sorry to say if you are one of the ones that fell for it, the joke was on you.

Here’s the thing; all the businesses that depend on a healthy real estate market and the homes themselves produce discretionary items. Discretionary means things you don’t actually need but want them anyway. Those things have been deflating and all the while the non-discretionary items, things you have to have, have been rising in price or inflating. Think food and energy.

Marketers have been making Herculean efforts to create the illusion that inflation is under control despite the irresponsible money-printing marathon at the Fed. But, have you been paying less at the super market? Are you paying less at the gas station? Food producers have gotten really sneaky. They charge about the same price but the amount that you get has shrunk about 20%.

Another way that inflation has been hidden is through the importation of cheap goods mostly from China. The prices seem very reasonable but most of the products are of such poor quality hardly last any time at all. Over time you are paying much more because you have to keep replacing these "cheap" items. Once upon a time, when Americans still made things, things were of great quality. I have heirloom furniture, kitchen utensils, and tools that are 50 to 100 years old and still providing me with fine service. But, the new imported junk I must buy because there is no viable alternative is lucky to make it past a year.

All of this goes a long way toward giving the illusion that inflation is fine as told by the Consumer and Producer indices. Of course these are government statistics and subject to any manner of additional manipulations.

Another inflationary by product is the debasement of the currency. Here’s a real life anecdote on that subject. When I moved to northern Montana in 2002 I frequently shopped in British Columbia. At the time I got $1.40 Canadian for every $1.00 US. It was very nice. Goods were expensive in Canada until I factored in my 40% currency discount. I used to tell people to enjoy it whilst it lasted because the Loonie is going to parity with the U.S. dollar. I was openly laughed at. I don’t really mind. I’m used to it. I was universally laughed at ten years ago when I said gold would go to $1,500/oz. As I write this article a U.S. dollar won’t even get you one Canadian Dollar and gold recently hit $1,425.

Back in 2002 Montana plates were everywhere, not anymore. Canada has become incredibly expensive for Americans. Montana plates are seldom seen. Now you see huge numbers of Canadian plates in Montana. Northern Montana has become like a third world country where well to do Canadians come to throw their weight and money around. Most merchants welcome them. And rightly so for without them we would be in far worse shape than we are.

So, back to the inflation deflation-debate: I say it isn’t either or. I say it’s both. But, the important distinction is that the things that are inflating you can’t do without whilst it’s the things that you can do without which are deflating. To my simple, backwoods mind that makes inflation a much more serious concern. And all this money printing is going to come back to haunt us.

As an outdoor photographer who lives and works with nature I have a very healthy respect for natural cycles. Nothing on earth is as powerful or certain (besides death and taxes of course). Man, in his arrogance, can attempt to circumvent the cycles to meet his own greedy purposes but in the end all he will do is make things worse. Nature eventually holds sway and forces the cycle to go where it was meant to go with far more onerous consequences than if the cycle had been left alone to follow its natural course.

We are a long way from being out of the woods. I am just ever so grateful I know how to live in them.

©Kinsey Barnard

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Dave said...

I think you are right. Deflation makes no sense when dollars are coming out in rolls like TP.

Kinsey Barnard said...

LOL! And TP is what the dollar is going to be worth in most currencies and our standard of living will truly be in the outhouse!

Elaine said...

Love the post - especially "We are a long way from being out of the woods. I am just ever so grateful I know how to live in them."
Me too!
ps.... love your photography!