Sunday, December 21, 2008

Finding Good News in Falling Prices

NY TIMES -- So amid all the legitimate worries about deflation, it’s worth considering what may be the one silver lining in the incredibly bad run of recent economic news: The cost of living is falling. The cost of fruits, vegetables, clothing and vehicles are all dropping. Housing prices have been falling for more than two years, and a barrel of oil costs about $45, down from $145 in July.

Jobs are disappearing, bonuses are shrinking and raises will be hard to come by. But the drop in prices, which isn’t over yet, will make life easier on millions of people. It’s possible, in fact, that the current recession will do less harm to the typical family’s income than it does to many other parts of the economy. Strange as it sounds, the drop in prices will keep real incomes — inflation-adjusted incomes — from dropping too much.

MP: The graph above shows annual CPI inflation, which fell to a 43-year low of 1% in November.


At 12/21/2008 8:04 PM, Blogger PeakTrader said...

This doesn't feel like a severe recession. Gasoline prices are near $1.50 a gallon, milk is much cheaper, airfares are very low, 30-year home mortgages are down to 5%, autos are being given away at costs, a lot of goods are 70% off at retail stores.

Of course, global production is down. So, eventually, there will be fewer private goods causing inflation to accelerate. When excess assets and goods clear the market, output will increase. However, Americans are stocked-up. They don't have to buy many goods for many years, and will continue to pay-down debt and build-up saving instead, while maintaining autonomous consumption.

I'm surprised there's no debate on Obama's complex, slow, unfair, and inefficient plan to stimulate the U.S. economy. A large tax rebate is the fastest way to clear the market of excess assets and goods.

I suspect, when the goods market clears, U.S. real income and inflation will accelerate, and U.S. real consumption will increase at a slower rate in the 2010s than the 2000s.

U.S. fiscal policy over the past few months has done more harm than good to the U.S. economy. However, it has done even more damage to export-led economies, which are shifting from overproduction to underproduction quickly, while underconsuming even less.

At 12/22/2008 1:42 AM, Blogger wcw said...

This doesn't feel like a severe recession because if the economy troughed tomorrow and turned up in a hard V bottom, most people would come out of it mostly all right.

I peg the chances of that happening at roughly 0.

As for the mooted superiority of tax rebates at doing, well, anything, please document. That the issue currently is restarting a stalled economy, not clearing overstocked markets, is almost besides the point.

It does tend to highlight the vapidity of your comment, though.


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