Is Deflation a Real Threat?

by Bryan Hancock
(Austin, Texas, USA)

Shadowstats (site) has a graph of the real inflation numbers...not the ones manufactured for consumption by the masses. Deflation causes people to delay purchases, which is bad for the economy overall. Why would you buy something now if you expect for it to cost less later on? If it is something you really like and can get utility from now you will likely buy it. Otherwise you will wait and get it at the discounted price later on.

Housing is just one component of the CPI. As housing prices fall in different areas of the country those lenders with frothy pieces of the debt stack will be in severe risk of losing all of their money. Homeowners will be stuck and not be able to move unless they had sizable equity cushions with large down payments. Even if they could move they likely won't because they are anchored cerebrally to the amount of equity they had in the past. The wealth effect in reverse! If you feel poor because you just lost a lot of equity in your house you are much less likely to buy stuff anytime soon.

What is happening in the present time has a lot to do with other currencies. The dollar is starting to look pretty strong relative to other rival currencies because of their massive entitlement programs and fiscal disarray.

This is an extremely complicated subject that relates not only to housing or our own economy. It has a lot to do with the world economy and how we fit in with the whole system. You could run some econometric models to try to predict what will happen with inflation in the future, but if you knew that you could easily make millions betting on currency futures instead of going through the REI brain damage exercise.

My personal opinion is that inflation will likely rise over time as the economy roars back. We have several years of pent-up demand from this gnarly recession and banks will eventually start to come out of their shell and lend money again. I don't think we are going to have massive swings in the CPI one way or the other. The Fed does a reasonably good job of managing their cartel so as not to piss off the masses.

Bryan Hancock, The Entrepreneur's Incubator
http://www.entrepreneurs-incubator.com