Coming out of this weekend, you may hear some news reports saying that retail sales increased to save the year for many retailers. The people that will be telling you this are either ignorant, or they are hiding the truth...that we are in a deflationary period. What follows deflationary periods?? Typically hyper-inflation. Yikes.
Sorry to be a downer over this holiday weekend, but I think our economy is hanging on by a thread...and no one is saying a darn thing about it. Of course, I'm not an ecnomist myself, but I am a common sense guy, and my common sense alarms have been going off for a while now.
So what is deflation, and why aren't people talking about it? Deflation is when prices decline in relation to wages. This may sound like a good thing, and perhaps sporadically, or in cases when prices were artificially inflated, it is. But when prices are dropping in bulk or across a spectrum, it isn't.
Think about it. We want the value of our house, e.g. house prices, to rise...wage earnings rise...the inflation that is built into our economy rises. Everything in our economy rises, except during corrections such as a recession, or when idiots mismanage/over-manage a recession, a depression.
These after Christmas sales aren't about retailers being kind and wanting to give shoppers a deal out of the kindness of their hearts. They need to sell product. They can't sell it at regular price...so they have to reduce the price, via a sale. When sales of regular, non-holiday items are in the area of half off, that's beyond your typical sale. That's a price reduction without calling it that. Retailers are having to reduce the prices just to get shoppers to come out to buy things. They call it a sale for marketing purposes...but if items were only 10 - 15% off, most people wouldn't waste their times this time of year in this economy.
How do you get out of a deflationary period before retailers just start closing their stores because they can't make a profit on such deep mark-downs? Well, the federal reserve typically increases the money supply, creating inflation, to get prices to rise again. Well, unless you've been in a stupor for the past year, you know that the federal reserve has already pumped a couple trillion dollars into the economy, with guarantees of up to 7.6 trillion in the future. Uhhh...that's some massive money supply there already. They are printing money like it's going out of style with these promises...because I assure you, the federal reserve doesn't have trillions of dollars sitting around in a vault somewhere.
So if the federal reserve realizes that they are in a deflationary period and tries to introduce more money into they supply...that could create hyperinflation. Hyperinflation, by definition, is out of control. That leads to those $10 candy bar prices I was talking about over Thanksgiving because hyperinflation begins to greatly devalue money.
If you think back 10 years ago...what was the general cost? The two examples I have on the top of my head is McDonald's hotcakes and gas. The age range I'm thinking of is roughly 14 years ago, but both of those things cost at least half of what they cost now. That's inflation. That's roughly 7% inflation, which is solidly more than what the government tells the public the inflation rate is...but I digress. Think of what "out of control" inflation will do? It could double prices in the range of a couple of years, rather than 7 years or more. Wages can't and won't keep up with that kind of inflation...hence a horrible economic situation occurs. Depression.
I hope to God that it won't come to that. But I think that's the path we're headed. Don't let the economic talking heads tell you that everything is rosy without specifically saying how we will or have gotten there. Some economist on NBC today said that the recession will be officially over in 3-6 months because Barack Obama is coming in and will change economic policy...that the market will reach bottom in the next month or two because it's been so fluctuating recently.
Hogwash! Tell me some specific, logical indications of how these are going to happen?? They can't...hence, they don't. They just paint a rosy picture. Whether they believe it or not, I have no idea. I hope they don't actually believe what they are saying, or we're in worse trouble than I thought we'd be in. If our economic "experts" believe that the fed throwing money at the situation isn't like throwing gas on a raging inferno, we may have lost not just the battle, but the war.
So what can you do if an economic apocalypse is coming? Well, nothing if that's the case, but let's just say what you can do if a depression is coming? Pay off debt...save money...stock up on essentials. If this economic tsunami doesn't happen, you're in a sweet position.
Don't do what I did and go out and buy a new flat screen TV before paying debt. That was a battle I wasn't going to win, though. It was from mostly Christmas money(as hard as I try, I can't win an argument to use Christmas money to pay debt)...and it was replacing a television that was over 15 years old. Our other television is 5 years old and still chugging along fine. So it wasn't like we were buying something that we have a track history of replacing every couple of years. Besides, I'm winning the war...we've got a good game plan to be completely debt free except for our crummy little living-within-our-means house(and my stupid student loan) in a year.
Hopefully my oh so simplistic way of looking at problems is just too hayseed for those fancy Washington economist types, and hopefully I'm way off my rocker. In any event, it's time to live like our grandparents taught us...well within our means. Good luck! I'll be hoping and praying that a horrible scenario doesn't happen so we're all living on easy street in a couple years.
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3 comments:
I think that unfortunately, you are right my man. And on top of this, the mtg. issue is far from over. All of those 1,3,5 and 7 year Adjustable Rate Mtg.'s that were originated over the last few years will begin thier adjustment period in 09,10,11 and 12. So payments will go up for not just the sub prime borrowers but what we called Alt A borrowers who will not be able to afford the higher payments and won't be able to refinance due to restricted guidleines now.
The foreclosure mess is only about half way complete.
It is not a very good outlook.
But that's the thing: they want you to go out and buy that flat screen TV. They paint the rosy picture so sales will increase and your savings will decrease.
Very scary.
Right...my post falls under the do as I say, not as I do category. :)
Seriously though, it was mostly Christmas present money that purchased our new TV. There's no way I was going to be able to talk my wife into using her Christmas gift(money) on paying a bill.
Our eyes are wide open though...hardcore focus on paying debt from here on out. I recommend that highly.
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