Right now we have fallen through the looking glass. The United States Government is promising Trillions of Dollars in bail outs and so-called stimulus packages to avoid something that scares them to death - DEFLATION!
Once upon a time all western governments agreed that the most important thing to a nation's economy was to keep inflation low and under control. And so it is a shock to discover that right now these same nations and their top financial advisers are trying to find ways to create inflation and to avoid something that REALLY scares them - DEFLATION.
Personally I think that deflation gets a bad rap. It isn't simply about falling prices, it is also about printing less money so that money is worth more. What is wrong with that?
If you go down the other road - the one we are on right now - then the amount of money in the system is being increased dramatically and when you print all this money it actually becomes worth less until you get to the point of pre-World War II Germany when people were taking home their wages literally in wheelbarrows.
Perhaps the scariest thing of all is that I'm no economist and I get it. Our political leaders, our financial leaders and even our community organizers seem not to understand this very simply concept. 
Printing money doesn't get you more things - it just takes more of that money (because it is worth less) to acquire the same number of things.
Now while I already said that deflation gets a bad rap, it is important to understand the pitfalls of a deflationary economy to a nation like ours that lives on credit. If we hadn't have forgotten who we are supposed to be and continued to live within our means then there is no downside to deflation, but with the current debt carried by the United States it is certainly an issue.
Seventy percent of our economy is based on consumer spending and deflation actually encourages those with money to hang on to it - because the thing they want will cost less tomorrow and even less again the next day after that.
But - and this is important - deflation actually slows Government growth (always a good thing) and also holds back a further expansion of the welfare state. Through history, certain economies have shown great growth during deflationary periods.
We have a serious problem. The powers in charge do not wish Americans to save money - because if they did, then the recession would be much deeper and longer. They are printing money at an incredible rate. The Government has so far spent or pledged $5-trillion and that's without the new Administration's promise of another half trillion and without bailing out the auto industry! And perhaps most scary of all - without Social Security and Medicaid!
The deflation we are witnessing is debt deflation - and that is nearly impossible to reverse and that is also why the Fed Chair and many others are fighting like crazy to create enough inflation to put a major beat down on the big D.
________________________________________________________________________________________________________
(Copyright © 2008 By Simon L Conway All Rights Reserved.)
Simon Conway is the winner of the FIVE STAR Best in Client Satisfaction for Real Estate Agents in the Orlando area.
Please give me a call if you have questions about the Central Florida real estate market. You can reach me on 407 876 8200. Also visit my web site at www.simonconway.net or www.move2orlando.net
Comments(20)