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.

A Huge Regressive Tax for Americans

We had hoped to report on further FDIC closures, but there were none.

The "Waxman-Markey" bill winding through Congress has an ostensible purpose of capping carbon dioxide emissions. According to US News and World Report, if passed, it will cost the average household as much as $1600 per year, "with low-income households carrying a heavier burden."

A puny, $160 per person tax credit is being proposed to offset the cost, but that will do little to help the average citizen.

Whatever the merits or demerits of a 'carbon tax', it should be presented in a revenue-neutral fashion. The current proposal will have a decided, depressive effect on the economy at a time when such effects are most definitely not needed.

The share of the US economy managed by government is at an all-time high, and still growing fast. This ill-conceived 'energy plan' along with similarly ill-conceived mandatory health insurance programs may push the Nation, already burdened with bailouts and nationalisations, too far down the road of a command economy.

Central planning does not necessarily wreck an economy, of course. Many European nations have a fairly high level of government involvement with the economy and still enjoy a high standard of living. But there, better social welfare results have been and can be expected from the taxes and regulation. We believe that is because socialism, whatever its demerits, is a proactive and coherent movement to distribute public benefits. In the USA, socialism is ideologically extinct, and government intrusion is reactive and self-serving.

A European level of government economic control in the USA will not yield European-style benefits, but an economic catastrophe. Mark our words.

More about Las Vegas

Foreclosures are up just about everywhere, we suppose, but nowhere more than ... you guessed it - Las Vegas, Nevada. Quite recently The Frugal Scotsman discussed Las Vegas as a bellweather of foreclosure catastrophe. In the post, he surmised basically everyone in Las Vegas with a mortgage is 'underwater' - owing more than their property is worth.

Well, we discovered in this CNNMoney.com article that fully one in fifty-six households in Las Vegas suffered foreclosure process last month alone. Unfortunately, the article does not define household precisely. If it did, we would know if that meant households in general - owners and renters alike - or if it meant households that are owners. If it is the former, since about half of households own with a mortgage, the rate would be approximately one in thirty households with a mortgage...in one month!

At that rate, should it continue, it would take but a few years to achieve complete Real Estate Gotterdammerung - wipe out for every mortgage holder: either walking away, or having a date with some deputies. We do not see this being particularly unlikely.

Even if the article were using a non-standard definition of household to mean homeowner, it would be still approximately one in forty homeowners with mortgages facing losing their houses.

Like the apocryphal lemmings going over the cliff, participants in the Great Las Vegas Housing Bubble seem to have experienced herd behaviour at its worst and are paying the price. Las Vegas is the worst in the USA for now, but only because it represents the non plus ultra of how bad things can get.

We have no doubt that many other cities, and indeed even whole regions, will suffer similar fates. As much as one-third of householders will be removing to rentals, friends, relatives, shelters, or the streets (depending on their resources) in the space of a few years. But this is only a portion of what is shaping up to be the greatest economic calamity in the nation's history. Mass unemployment, underemployment and widespread ruin are developing concurrently.

Disaster Economics

We remember the flap surrounding the origins of the TARP, when former Treasury Secretary Hank Paulson, Jr., told Congresspersons that martial law would have to be declared if the bailout were not quickly passed. If memory serves, words like 'catastrophe' and 'crisis' were bandied about. A dystopian landscape was painted for the poor elected officials, who apparently weren't intelligent enough to seek a second opinion.

Fast forward to today... and we find President Obama making more-or-less the same comments, albeit without the martial law part. Still, suddenly it's just fine to be using the very same phrases that netted Bush flak. The economy is in "a crisis," so the money's got to flow fast and furious to prevent "a catastrophe," says the new President.

"This economy needs support," whines Mr. Bill Gross, or else the United States will enter a "mini depression." By "this economy," we assume that Mr. Gross means his mutual fund portfolio, but we could just be cynical.

All this rhetoric is at once silly, and disturbing. If the Government and big-shot Investorati types manage to keep the citizenry of the United States in a state of reactive fear, any amount of deplorable -- if not downright illegal -- actions will likely be taken. Fear, above all, makes the average person less able to read the fine print... and there will be a lot of fine print in the months ahead.