Jan 03 2009
Why is Deflation Bad?
It’s Christmas and as a store owner, you have merchandise to move. But the season has been slow, and the buyers have gone to discount stores. You need to clear out everything for a new spring lineup. Sale time! Discount as many as you feel can clear the floor by dropping it to where you will get little or no profit and can get out new items.
Sound familiar? It should, because that is exactly what is happening today. Consumers are delighting in the bargains, grabbing what they can afford. Ironically, they may be dancing to the death march of a business.
If profits are not healthy, especially at Christmas, stores close, people lose their jobs. So while consumers revel in the cheap prices of goods, the pea counters in the business are looking at who to ax.
It’s sometimes tempting to think that deflation is a good thing. After all, constant inflation seems to eat away at us year after year. Or so it would seem. There’s a nagging voice in the back of our minds that says, “If only we can go back to ten cent gas, or nickel candy bars.”
The problem is, that means we would have to cut our wages to compensate. That happens, also, during times of deflation. Laid off workers grab what they can for a job, and sometimes it means making less money. But the cost of some services never go down. When is the last time we heard of the electric company slashing the amount you are billed? When was the last time we saw a decrease in garbage, sewer and water bills?.
Deflation hurts the personal worth of people. Take Mr. Trucker, a homeowner with 2.5 children, a $35,000 retirement portfolio, and an $80,000 house. On his land in the backwoods sits old cars and chunks of old machinery that he has taken off of the hands of locals for years. When the price of steel and other metals was high, he called to get the traveling metal shredder to stop in and pick up. But because of intense demand, the shredder was busy in another state, and the owner of the shredding busines promised to get around to his place when he could.
Then the price of all metals fell off of a cliff, and Mr. Trucker is now looking at a field of $1,000 instead of $10,000. On top of that, the trucking firm that employs him, has been slower lately because businesses are not moving as many goods. Mr. Trucker’s $80,000 house is now appraised at $40,000, and the stock market just ate away his portfolio to $15,000. That’s the power of deflation
“But it will come back, right?’ whispers a voice. Sure, if you are in your twenties and thirties, it should come back by the time you are older. But for the forty year olds and older, life has just become very interesting. Paying for a child’s college may not happen. Neither might an early retirement. For some folks, retirement has gotten to be questionable.
That’s why deflation is bad. It robs the country of net worth and businesses of a chance to be successful; it takes away jobs from employees.
Excellent explanation on the bottom line of why deflation is so harmful. Great blog! Ms. Therese of careermysteries.today.com and now also healthmysteries.today.com.
Great blog,some experts are saying the Government bailouts will cause inflation.They are saying the inflation starts in 1 to 2 years.
As soon as oil begins to rise in price again, so will inflation, just as it did last time. The difference is that regular metals will not go up with them, as they went up last time with all of the building going on around the world. What people are very frightened of is hyper inflation, which may begin in that one to two year period. Thanks for visiting.