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Sunday, February 15, 2009

DEFLATION: May not be a bad thing

Don't hope for discounts
By Laura Mandaro, MarketWatch
SAN FRANCISCO (MarketWatch) -- Bargain shoppers, beware. The last time a major economy experienced repeat price cuts across a broad range of consumer goods, the stock market lost 80% of its value and unemployment hit its highest level since World War II. That was the outcome of Japan's bruising bout with deflation, which crept into the world's second-largest economy in the mid-1990s and didn't let up until 2006. As unappetizing as it sounds, a U.S. version of Japan's so-called lost decade could be in the works.

A two-year slump in house prices has spread into a broad recession, sapping demand and driving down prices of manufactured items like cars and clothes as well as commodities like gasoline and milk. The consumer price index, the most widely watched barometer of inflation, will likely go negative this year.
Deflation isn't here yet, says Sherry Cooper, chief economist for BMO Capital Markets, "but it's the closest we've come since the Great Depression."
"Housing prices are falling, commodity prices are falling, so are lots of goods and services -- that sounds scary to me," she said.
And some of the projections are enough to keep folks up at night. U.S. consumer inflation is expected to fall 2% this year, according to RGE Monitor, the economic research firm lead by New York University's Nouriel Roubini. The group also predicts deflation could persist until 2010 while the country flirts with "a near depression," says Christian Menegatti, an RGE analyst.

David Rosenberg, the notoriously bearish North American economist at Bank of America Securities-Merrill Lynch, sees deflation as the "primary risk" to investments in the near future. He expects the CPI to post year-over-year drops every quarter this year.
"It is truly difficult to believe inflation is going to be revived in the intermediate term," as Rosenberg put it in a report last month. more...

*Personally, I happen to think that deflation is a good thing. Yes, the new car I bought last year won't be worth what I paid for it. But that just means it wasn't worth what I paid for it in the first place.
Does anyone really think that a house was worth a million dollars? (even in Short Hills NJ, that is turning out not to be true). A truck for $27,000? An SUV $40,000(Auto manufacturers on brink of bankruptcy any indication)? A law degree $120,000 (too many of us)? A gallon of milk $6.00 (get a cow, its cheaper)? GET REAL.
If wages have not kept up with inflation, and they haven't, then how can anyone say that prices weren't "inflated". "Because I paid $1 mil for my home!" So because you were an idiot, that makes it worth what you paid? Forever? Do you realize that your children and grandchildren would never have been able to buy a home? Which parlays with you, FOREVER?
And the economists can worry about it all they like. Its here to stay and thank goodness. It is these same economists, (Greenspan who has said for years inflation wasn't a problem) who, along with some reckless bankers, and some thoughtless members of Congress, who got us here in the first place. Wake up people. A cup of coffee is not worth $2.32 (which is what I paid yesterday at Starbucks). Never was. Seems to me that just what this country's crisis needs is alot of DEFLATION. Finally, something to save us from ourselves.

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