Replies

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.