what deflation means to you

I'm talking about retail deflation. This occurs when prices start falling, generally in a troubled marketplace, like today.

So you may have noticed that gasoline prices are roughly half of what they were nearly 1 year ago. "Black Friday" sales are happening two weeks before the Thanksgiving holiday. You can get a laptop computer from Wal-Mart for $300, among other things. Retail prices are falling all over the place. Deflation? Yes. Why? Lower demand due to lower consumer spending. People are waking up. They're spending less. This can be a good thing because it keeps manufacturers in line. It also allows you to save more. But deflation, if taken too its extreme, causes a lot of damage.

For one thing, deflation means that companies are in trouble. They have to lower their prices, and therefore their profit margins, to stay afloat. They take incredible losses during this time. The illusion is that the consumer thinks all is fine and dandy and that his/her money goes farther. It does go farther, until you lose your job because your company can't sell anything. Retail deflation can be just as harmful as widespread inflation. The difference, however, is that deflation tends to correct itself quicker than inflation.

What is curious to me in all of this is the idea that the bailout package does just that - it will flood the market with nearly $1 trillion of new money, which will adversely affect the money supply and drive up inflation. Will that stabilize the economy as it was intended to do? I don't think so. For one, the credit industry is just a sliver of the economic problems faced in the country right now. Shoring up the balance sheets of a few select firms was just a ploy to keep the Boys' Club on Wall Street intact. It can't fight deflation and shrinking credit markets. It's not enough money. What will cure the current lending "crisis?"

The market will correct itself if left to chart its own course. Commercial banks will fill the vacuum left by the investment banks. If those large banks had failed, other instutions in good liquidity situations would have stepped up, acquired their assets at a fair price, and lending would continue. Instead, we are rewarding poor asset management with taxpayer dollars. Lesson learned? No.

All in all, deflation is something to worry about. It might seem nice at the gas pump or while holiday shopping, but keep in mind that retail deflation's lag will probably spread backward and upward - through suppliers, distributors, and outward to creditors and the like. Deflation means cut backs. It means lower wages and salaries. It means layoffs. But the market always finds equilibrium if left alone. We just have to convince our politicians that they can trust the market to chart the best course for us, or convince them that the government has no place rigging the economy whatsoever (fat chance!).

Enjoy your Thanksgiving Holiday.