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America is not Japan

Anyone who paid the going price -- about $1.5 million -- in the late 1980s for a house in the upscale suburban Tokyo enclave of Setagaya-ku, for instance, knows the pain: The house is likely worth no more than $900,000 today, often less than what the owner owes on the mortgage. Michiko Kanai thought the three-story apartment building she put up 15 years ago on a plot of land her father owned would see her through to retirement and allow her to leave something for her children as well. Instead, her debts on the building likely exceed its value by a half-million dollars because of the fall in property prices.

Coming soon to a city near you. The San Francisco Bay Area is full of people who are going to be badly underwater if there is even a 20% drop in prices - at 40% there will be an immense tidal wave of foreclosures. Thank the banks and their "qualify every borrower who can breathe and chew gum at the same time" philosophy in recent years.

While there are many bad things about inflation and some good things about deflation, inflation and deflation affect people's timing of purchases. If people perceive that the price of a good will go up tomorrow, they are more likely to buy that good today (to beat the price increase). If people perceive that the price of a good will go down, they are more likely to wait and buy the good tomorrow (to take advantage of the price decrease).

In the mid-1980's, video games experienced extremely major deflation which wiped out many companies in the industry and crippled many others. Once people got used to the fact that hot new games would drop from $25 to $10 after a few months, they started simply ignoring the new releases and only buying the cheaper, older titles. This resulted in the newer games being marked down more quickly (since larger numbers remained unsold) which in turn encouraged more customers to shun new games for marked-down ones.

It should be noted that many businesses, including--I believe--video games now include certain "deflation" protections. For example, many magazine and greeting-card publishers buy back unsold merchandise at full retail price. This tends to discourage retailers from seeking to unload their merchandise at steep discounts to customers who would be willing to wait out good prices.

I'm no economist but if someone was living on their savings (I wish) which were mostly cash or near cash and had little or no debt, seems to me they'd be sitting pretty - in principle at least. A rather general scenario I know, but am I missing something ?

...pluck your raw fish from a revolving conveyor belt.

Sorry, I just don't see the downside.

The sky is falling, the sky is falling!!! Help!! Please Save us Democrats!!!

If I had a nickle for every sky is falling article I have read the past three years I would be rich!

read later

Typical Business Week article, and they're good at predicting events that never happen and missing the larger stories that did.

Deflation, or lowering of the general price level, is not likely to happen in the US as long as we have a Federal Reserve bent on priming the pump with billions in newly-printed greenbacks, many of which go strait overseas to sit in some sheikh's vault.

For a saner perspective on the "threat" of deflation, read Hans Sennhoz's essay, "The Biggest Myth about Money " at the Ludwig von Mises Institute's web site.

I think that most of the discussion on deflation is overblown. If you look at the CPI, the only categories that are showing falling prices are apparel, automobiles, and technology items like telecommunications equipment and computer equipment. I will conced that apparel prices are down but they are almost all imported goods from low-cost countries. Automobiles and high-tech both have a quality component to them. This is the source of much of the "deflation" in these categories. If cars this year tend to have for example, side air bags and those last year did not, then BLS considers that a greater quality good and adjusts the price accordingly. Now, if you have to pay an addtional, say $500 for that feature whether you wanted it or not, the cost of the automobile went up by $500 to you but BLS might more than offset that price increase with their quality component of the index yielding a decrease in the index. In high tech those quality components are even greater. There you see double-digit percent decreases in their indexes year over year.

They do the same thing when they measure capacity used in the capacity utilization rates. Most of the increases in capacity took place in the high tech sectors and most of that was simply adjustments for quality. If a company makes processors that are 1ghz and then uses the same plant to produce 2ghz processors instead, their capacity just doubled. (Well, probably not doubled but increased significantly). In the government data it would show a sharp decrease in capacity utilization for that plant. This would occcur even if they had the same size factory, running the same number of machines, putting out the same number of chips, and having the same number of workers. Aggregate that out to the whole economy and you have some serious errors in the data.

My own limited observations show nothing but price increases in my day to day purchases. I wish that what I pay for gas, utilities, food, health care, etc. were not constantly going up.

Regarding real estate, most of the significant increases in real estate prices are occuring in metropolitan areas where demand far exceeds supply. I live in the DC area and all the new housing construction is taking place farther and farther out. I can choose between a two hour plus commute each way and pay a nominal (relatively) amount or pay a significant premium to shorten that commute.

Also, when people make home purchases they look at what their monthly payment will be and if they don't their lender sure does. A lower interest rate means they can afford to pay a higher price for a home and vice-versa. Right now interest rates are very low so people are either buying more home or are offering more to beat out a competing bidder.

Combine these two factors - demand greater than supply and the ability to pay more and prices will rise. I believe that there will be some correction when interest rates rise again, but it certainly won't be a collapse in the market.

So, again, I am not very concerned about deflation. What I am worried about is us allowing China to be the world's manufacturer. Almost all of their growth in GDP is coming from investment. But very little of this investment is turning a profit, but that doesn't seem to bother them. In turn, they are flooding the world with cheap goods. If we end up relying too much on China (or any one country for that matter) it puts us at considerable risk due to potential hold up costs thus conceding a disproportionate amount of market power to them by making them potentially the sole provider of most of our finished or intermediate goods. It is analagous to having your entire portfolio in one stock.

bump

Here's the moral - high taxes and too much Gov't social freebies don't work !!

Here's why:

Two major facts are left out of this article:

Japanese Gov't spending was way out of control in the late 80's and they kept raising taxes so high that people stopped spending money because they got taxed to death on their income and then again when they bought something. They even added a national sales tax on top of a sales tax. They limited cheaper importets to protect their own businesses. Interest rates were still high and money lending was hard to come by. To buy a house you has to have a 50% down payment for a 40 year loan.

Social services were at an all time high and Gov't spending couldn't keep up.

They tried lowering taxes to jump start spending and they even gave away free money but people just Banked it. Too little too late !