Mistaking Economic Depression for Deflation

There is a great debate raging in the blogosphere at present, over whether or not the United States is undergoing deflation. It is a question to which there is no easy answer, as systems like the United States' economy are incredibly complex. We personally feel that the U.S. is undergoing deflationary trends, which will almost certainly turn into significant inflation at some point in the future, but we don't think that deflation proper is underway.

Let us explain what we mean by deflationary trends: certain things are getting cheaper. We've been seeing some great deals on meat and meat 'products' recently, and our local grocery is carrying organically-raised medium eggs for 97 cents a dozen. Some other food products have also gotten cheaper, like the roasted almonds we are partial to, but for the most part our food bills have remained relatively stable.

In short, deflationary trends are scattered drops in price within a broader niche of the economy, but not the entire niche experiencing overall drops in prices. In proper deflation, one could expect all prices within an effected niche to experience reductions, caused by a concurrent rise in the purchasing power of one's currency. Although our perceptions of the situation are indeed limited - as we are but one person - we have not seen evidence of an across-the-board increase in the purchasing power of our U.S. dollars.

What we expect the 'deflation' that commentators see is the effects of the 2007 Depression. Those eggs we mentioned are probably not getting 'cheaper' per se, but rather the company which owns the chickens which lay the eggs are selling said eggs at liquidation prices. We posit the same goes for meat and meat 'product' producers as well.

To put the situation in more general terms, the 2007 Depression is exerting enormous pressure on the entire economy, and certain companies are moving faster than others in order to liquidate excess products. This will create the appearance of honest-to-goodness deflation, when the situation is perhaps more along the lines of a liquidation of certain niches or industries. Muddying the waters, as it were, are the concurrent bursting of various bubbles (such as housing prices, automobile manufacturers, et cetera), the products of which are dropping rapidly in value.

To conclude, the U.S. economy is cratering, pure and simple. The prices which one may expect to find on products one wishes to buy may fall to some degree or other, but we don't expect to see full-on deflation in this Depression. Rather, and as long as the economy catastrophises faster than money creation by the Federal Reserve, we posit that prices will stay relatively the same. The exciting part will come sometime in the future, when the economy completes its face-plant; it will be at that point when the Fed's money-printing will come home to roost.