Deflation - An Economist's Illusion or the Real Deal?

Okay, so the Obama administration says we are in a period of deflation as opposed to the typical inflation we normally see. Deflation, a rather pathetic word that reminds me of a flat tire. But deflation should be great because it means prices are going down, not up. But there is one problem, some major price categories seem to be going up to me.

To understand what people are talking about let us take a look at the Ask.com definition of the term "deflation" and what it really means.

Question: What Is Deflation?

Answer: The definition of deflation is when asset and consumer prices continue to fall. This may seem like a great thing to consumers, except that the cause for deflation is a long-term drop in demand.

Unfortunately, a drop in demand means that a recession is already underway, with job losses, declining wages, and an ongoing decline in the value of your home and your stock portfolio. Deflation is a result of businesses dropping prices in a desperate attempt to get people to buy their products.

Officially, deflation is measured by a decrease in the Consumer Price Index. However, the CPI does not measure stock prices, which retirees use to fund purchases, and businesses use to fund growth. It also does not measure housing prices, instead using rental equivalent. This often lags home price declines, and underestimates deflation in the CPI.

To combat deflation, the Federal Reserve executes an expansionary monetary policy. It reduces interest rates, and increases the money supply in an attempt to jump-start economic growth. In addition, the government can offset deflation with expansionary fiscal policy. It can put more money into circulation by lowering taxes, increasing government spending, and incurring a temporary deficit to do so. Of course, if the deficit is already at record levels, that tool may no longer be available.

Like inflation, deflation is very difficult to combat once it is entrenched. As businesses and people feel less wealthy, they spend less, reducing demand further. Prices drop in response, giving businesses less profit.

I don't know about you but it seems to me gas has started rising again. In fact the price per barrel of crude oil, which impacts on many supplemental products from transportation to fertilizer, has increased 90% since the beginning of this year alone and now stands at about $62.00 a barrel. No wonder OPEC did not reduce the amount of oil produced this week when the price now is above the 2007 prices in place before the outrageous price spiral.

Taxes are certainly up, especially state and local taxes, and you can bet the aftermath of the incredible federal spending will be substantial future price increases. Obama has already set a new record for the annual federal deficit and the stimulus and bailout programs are just starting to spend money with multi-billion dollar bailouts waiting in the wings for a bankrupt Chrysler and General Motors and a teetering AIG insurance giant.

A lot of food prices are up or they have cleverly repackaged items so we are paying the same for less goods, thus really increasing the price. Organic foods are not dropping either even though there has been a push to be healthy and sales are up.

Certainly restaurant prices do not seem to be falling. In fact with the addition of designer coffee in McDonald's some prices are actually going up as well. When there are "specials" it usually means you get a silver dollar sized hamburger instead of the meat eaters delight we've grown to love.

Medical and health insurance rates continue to spiral in spite of the Obama efforts to overhaul the health care industry. After a decade of double digit annual price increases this year prices are expected to drop down to just a 7% increase. Only in our nation's capitol could a 7% increase be treated as a drop in prices.

As the definition said, two of the most important cost factors missing from the deflation figure are stock prices and housing prices. No one will question that these two have dropped with stocks, and your retirement funds, still about 40% less in value than a year ago.

Housing prices have also gone down, a lot in some areas. But the national market tends to be local market driven so one area may have no loss in value over the recent years (2006 - 2009) while a neighboring area could have substantial loss of value.

Take, for example, the case of Coltons Point. The Washington, DC metro area including Northern Virginia and Maryland has suffered an overall loss of value of about 24% the past year. However, a Washington Post survey of all home sales in the metro area the past year shows there are a few locations where prices have actually increased. One of these unique areas is the riverside resort of Coltons Point where values have increased by over 3% the past year.

Still nationwide stock and housing prices have dropped but neither is even factored into the deflation model which makes me wonder just what value is the economic news on deflation? It is distorted since it missed two of the biggest cost factors. The Consumer Price Index which is the basis for determining inflation or deflation is often a lagging indicator of economic performance much like unemployment figures. Conversely the stock market is a forward indicator of economic growth having already factored in jobs reports before they are even released.

The Labor Department figures on new unemployment claims this week dropped well below analysts expectations for the 2nd time in three weeks yet the unemployment rate climbed to 8.9% and the lagging figure could reach 10% later this year even if the economy is in a full recovery cycle as the Coltons Point Times and more recently other financial news services are beginning to predict.

In light of all this conflicting information and simultaneous upward and downward economic pressure my advice is for you to ignore deflation and inflation reports and the endless speculation about them as it is something the Federal Reserve must manage and we the people have no role in what the Federal Reserve does with our money anyway.

The Economic Meltdown - Where do we go from here?

If you were a regular reader of the Coltons Point Times or previous work by the editor you would be a lot richer than you are today. Since the '70's we have predicted the economic, stock market and housing fluctuations, trends and crashes with unusual accuracy from the oil manipulations of the '70's and 2007 and 2008 to the real estate mess in the early '80's and 2007, from the dot com meltdown of 2000 - 2002 to the interest spiral of the late '70's.

For years we have warned you of the conflict of interest of the "industry analysts" employed by Wall Street to influence stock prices. We listed the billions of dollars in fines paid for fraud and corruption in the financial and pharmaceutical industries and watched with awe as Congress passed the $700 billion bailout to save the same firms. Over and over we warned that there was nothing "free" about our free market system that is being manipulated by sources far more powerful than our government.

Wall Street and Madison Avenue, the financial and advertising centers of the universe, have joined forces to brainwash and spoon feed the American public with seeds of greed, obsession with materialism and disregard for laws and authority. Here we are today, a new president, a Democratic congress, and an inspired electorate yet the same architects of our current economic chaos are firmly in control of both the present and new administration.

Nearly a trillion dollars in bailouts have already been approved by Congress and our new president, a second multi-billion dollar bailout will be approved before Obama is even sworn in as president. House Speaker Pelosi is meeting today with the auto manufacturers and union leaders to decide on a second 25 billion dollar bridge loan. Barney Frank has promised just about everything to everyone while Pelosi is treating the Treasury as an endless pit of money and our new president may not even have a voice in what takes place.

Make no mistake, Madison Avenue convinced us we must have everything and Wall Street served it up through the maze of financial tricks of the trade and no one bothered to ask do we really need all this stuff. No one bothered to wonder why car companies were making more money off repairing your new car than selling it as "planned obsolescence", in other words making cars that would break down, became a bigger profit center.

Our FDA has turned its head to the proliferation of new drugs from an industry used to charging about 10 to 20 times the fair market value for prescriptions. Tens of billions in fines have been paid by the same pharmaceutical firms for fraud, price fixing, and bribes to doctors and hospitals. Yet Congress wants to expand our already broken and highly corrupt health industry to provide unnecessary medical care and drugs to everyone.

Many consumer product companies are in serious trouble because people did the only thing they could to survive the financial disaster, they stopped wasting money and started saving what little they had left. That is a very good thing but will extend a recession for those interested in bailing out Wall Street. Our media became dependent on advertising dollars that no longer exist so watch for television, radio and cable stations and networks dependent on advertising to start going under.

Our internet firms like Yahoo, Google, E Bay and millions of small businesses on the net will see their value collapse even more as the ad money dries up and as people realize that internet advertising really is the most over-valued method of reaching people with an undiluted message. Credit card fraud, cell phone fraud and identity theft flourish as a result of the internet and the failure of anyone to protect the consumer from such predators. Automated banking will be the next victim of the internet.

Entertainment companies including the record industry are operating with a broken business model and have had to resort to corruption to make money. The five largest record companies in America have paid tens of millions of dollars in fines recently for bribing radio stations to play records and now over 600 radio stations are under investigation for corruption. The record industry is beyond fixing and must collapse.

Many of the very industries our Congress is saving have no business in a free market economy where innovation, quality, service and competition are supposed to be the dominant attributes. Right now we reward fraud, corruption, greed and unfair business practices. How long is the American public going to continue to support the industries with their money and support their protectors (Congress) with their votes? The day of reckoning is at hand.

What happens if the USA has a Financial Meltdown?

If any other nation of the world faced the financial disasters we faced the last year from the oil price spiral to the housing catastrophe, the doubling of food prices to the largest budget deficit in history they would have been foreclosed, bankrupted and sold at a sheriff's auction.

The leaders would have been strung up from the nearest lamp pole, the people would be rioting in the streets, there would be a breakdown of authority and anarchy would rein supreme. So why are oil prices in a free fall, the stock market soaring, people calm and politicians still in office?

There is one intangible in economics that defies all rules of accounting and all standards of financial integrity. It is an intangible that stands in the face of common wisdom and sinister manipulation. It makes executives buffoons, analysts liars and politicians fools and in the end stands in defense of the helpless and silent majority called citizens.

It is the spirit of a nation born out of revolution, hardened by civil war and awakened by world wars. It is the spirit of freedom that guides the United States and makes it the envy of terrorists and financiers, the super rich and despots, warmongers and human rights violators, and all of those whose lives are grounded in evil and motivated by greed.

The American Spirit has withstood the test of time and the trials of sacrifice and never faltered from its ferocious defense of freedom, protection of human rights, its sense of fair play, its tolerance of diversity and its foundation in spirituality. True spirit can only come from a higher force like spirituality, a fact our Founding Fathers knew well and our current leaders keep trying to forget.

The United States is not old, it is still young and it will never lose its youthful enthusiasm because our Founding Fathers made it a living, breathing modern nation the day they adopted a Constitution that was the first in world history to be first person present tense.

The USA is the richest, most powerful and still most generous nation on Earth no matter who is the present pretender to the American seat of power (the president) for in truth the president and congress work for the people.

Our nation, under God, has evolved and grown for 232 years making it one of the oldest continuous forms of government yet one of the youngest nations in world history. Our role in the world far surpasses that of being a super power. People want what we have and we buy from others what we need and the result is an economic system that is the most unique, yet most stable in history.

I mentioned in a recent banking article how 15 of the top twenty banks in the world are from Europe. Two others are from Japan, meaning 17 of the top 20 banks in the world are from other nations leaving just 3 of the top 20 from the US. Yet the profits and losses of all those world banks are dictated by the US economy, no one else.

The world would be bankrupt if the US was bankrupt. The vast majority of money in the world is driven by the US economy, what the US needs and what the US generates, and the nations of the world, like it or not, would fade away and die without access to our markets, goods and services.

That is not an indication of arrogance but a statement of fact. We are in a financial mess but one we have faced before and when our leaders prosecute the crooks including those sitting next to them in our seats of power the system will heal and the world will be stabilized for a time.

Pay no attention to the purveyors of doom and gloom in the corporate boardrooms or on the evening news. They do not share our agenda. And we do not share their agenda. In the end they cannot win as their motives are not pure and their actions are not good.

Those that have tried to use the resources of America for personal gain will be stopped. Those whose greed drove them to manipulate markets, fix prices, corrupt associates and bribe officials have had their moment, even disrupted the world economy in the process.

In the end all the true enemies of the US are dependent on the US and cannot allow our country to fall into ruin. We have the only economy capable of making them billions of dollars and of protecting their trillions of dollars of investment in the US. The Spirit of America remains a beacon drawing the people of the world to us and that spirit will continue to dominate the world until it has spread throughout the world.