Nov 19 2008

What do you think about deflation?

The economy just might be on the way to “fixing” itself, if it doesn’t destroy itself first. According to this article, consumer prices had reached a 17-year high last July. Now, consumer prices are starting to drop.

**EVERYBODY PANIC!!**

Deflation (the opposite of inflation) is starting to happen as energy prices are falling and the demand for various consumer products are decreasing. Lately, many of us have been able to put gas in our cars for well under $2 in many cities. Compare that to the $4+ we were paying earlier this year, and you really can feel the difference.

In the short term, folks are getting more for their money at the gas station, grocery store and more. And, many are starting to actually put money in savings and reduce their spending. Frugal living is so hot right now, ya know?

So what’s not to love? People are being more responsible and they’re paying more reasonable prices for things.

Well, economists are here to tell us that lower prices can result in even more layoffs and businesses closing. Businesses might be having a harder time breaking even or making a profit. And, if consumers think that prices are going to keep on dropping, they probably are going to hold off on all “unnecessary” purchases. Why buy a fancy TV now, when it’ll be $300 cheaper next month?

More people out of work means even fewer people spending money, which means more businesses could go under. Bad.

Of course, in the long term, lower profit points could mean that companies need to become more efficient with their finances. Less wasteful spending, less overextending their credit, etc. That would be good.

The New York Times reports that construction on new houses has dropped by about 4.5 percent. All-time low levels, folks.

Two ways to see it: “Good! People aren’t building McMansions they can’t really afford. They aren’t creating expensive houses that the banks will foreclose on in a few years. They’re living within their means and buying existing houses.”

Or: “Construction workers might find themselves out of work. They might lose their own homes and have trouble feeding their families. Fewer construction loans affects contractors, construction workers, banks, the local economy, taxes, and more. A planned subdivision, now sitting vacant, means businesses won’t move to the area, prohibiting further economic growth.”

A tough situation, indeed.

I really do think that things will be fine in the long run. In the short-term, I’m worried about people who are losing their jobs and their houses. But, eventually, I have hope that the economy will correct itself and things will be better than they were before.

How is that going to happen? Haven’t a clue. I just want it FIXED.



4 Responses to “What do you think about deflation?”

  1. Goodness, can we find a balance and not be in one extreme or the other? I want it fixed too and I hope that it happens soon.

  2. Amen.

    MrsMoney’s last blog post..Repurposing Items to Save Money

  3. Deflation is not a good deal, but I don’t think it’ll last long. I think our main concern should be longer term inflation. The fed is pumping the money supply so fast, essentially by printing it out of thin air, that it’s going to bite us in the butt in the form of pretty heavy inflation down the road.

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

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I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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