It’s deflation, and we’re already in it.
The simplest working definition of inflation and deflation is an expansion of the supply of money and credit in the case of inflation. Deflation is the opposite, a contraction of money and credit. Despite recent price surges in food and oil, prices are declining across the board, and even those two headline-inflation items are down from recent highs. An interesting explanation of how this happens is on Mises.org: If the price of a good goes up (in the absence of an increase in the money supply), consumption must be reduced on some other good. This sounds more like common sense than economic theory, especially after the recent run up in gasoline prices.
The rule of thumb in deflationary environments is cash is king. This is no time for major purchases or unnecessary expenditures. Why buy today when the price will be lower tomorrow?
Stock Markets
Here’s what’s been happening in the Dow for the trailing 12 months.
(Picture on http://blownmortgage.com/ scroll down to 11 13 08)
This performance has had dire consequences throughout the economy. As one example, at the beginning of October, retirement plans had lost as much as $2 trillion — or about 20% — over a15 month period, according to Congress's top budget analyst .“The upheaval that has engulfed the financial industry and sent the stock market plummeting is devastating workers' savings, forcing people to hold off on major purchases and consider delaying their retirement,” said Peter Orszag, the head of the Congressional Budget Office. Savings across the board, even Harvard’s endowment, have taken a hit.
The US markets haven’t been the worst performers. “World equity markets lost an estimated $5.79 trillion during October, the biggest monthly loss ever,” according to Standard & Poor's Index Services. “The October loss eclipsed the previous record, which was set just one month earlier, when 52 global equity markets lost a combined $4 trillion. Through the first 10 months of 2008, world markets have lost about $16.22 trillion.”
Commercial Real Estate
Due to store closings and company bankruptcies, losses in commercial real estate are mounting. On Tuesday, General Growth Properties, one of the largest mall operators in the country, announced that it is near bankruptcy. Its stock closed at 35¢ today. Its only hope now is to become a bank holding company.
(Picture http://blownmortgage.com/ on scroll down to 11 13 08)
Residential Real Estate
Residential real estate losses are unrelenting and the magnitude of losses is staggering.
Here’s the latest from Case-Shiller.
(Picture on http://blownmortgage.com/ scroll down to 11 13 08)
The Deficit
OK, here’s something that’s up, the national debt, which reached $10.6 trillion the other day. The increase year over year since 2005 isn’t all that much.
(Picture on http://blownmortgage.com/ scroll down to 11 13 08)
However, if you look at the increase over a several-decade period, it looks like this.
(Picture on http://blownmortgage.com/ scroll down to 11 13 08)
Unemployment
CNNMoney.com reports that “The government reported more grim news about the economy, saying employers cut 240,000 jobs in October, bringing the year's total job losses to nearly 1.2 million. According to the Labor Department's monthly jobs report, the unemployment rate rose to 6.5% from 6.1% in September and higher than economists' forecast of 6.3%. It was the highest unemployment rate since March 1994.
These figures notoriously underreport unemployment, but the trend is clear.
I hope everyone has a few bucks in the house, at the very least enough for groceries and gas.
mg
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