The Economy Will Flirt or Go into Deflation

The U.S. economy should begin flirting with deflation soon, something predictable as far back as 2001 when the economy last brushed up against it. I also predicted its coming over two years ago, based on my studies that became my book, The Rigged Game.

Deflation is an overall decline in prices; a widespread drop in prices reduces profit margins. This condition triggers additional layoffs and other cutbacks than would otherwise be the case in an economy dominated by publicly traded limited liability corporations, jsut like the U.S. economy.

Most CEO’s know little as to how their companies produce goods and services. Let’s face it. It’s difficult for a person to know what’s going on if they’re the CEO of a multi-national corporation manufacturing airplane parts when they just transferred over from Walmart or some other unrelated corporation; and even if they've been with the same company for years and years, they most likely know little of what is going on in their factories and stores; or how their products are produced; and that is precisely why rising profits, dividends and share prices are primarily the sole determinate of the effectiveness of corporate leaders.

When business plummets due to a recession, CEO’s have no option but to reduce costs, because that's all they know how to do; and those cutbacks include employment, wages, salaries, benefits and business-to-business transactions. But then when prices drop on top of that, companies are more likely to experience losses as profit margins on their products narrow or are eliminated. At that point there is no choice; it's cut, cut, cut.

While deflation is good for citizens who have jobs, since it enhances their spending power, it increases the numbers of the unemployed, making the recession worse as more and more citizens are thrown out of work. Deflation can turn a recession into a Great Depression.

One final note: Deflation or even flirting with it signals that the re-distribution of income and wealth from working people to the affluent since Ronald Reagan was president has gone too far, inasmuch as it has choked off the demand for goods and services. That's why the mass of prices are likely to be going down in a deflationary spiral. That condition is precisely what the New Dealers figured out when they took office in 1933. And that's what they sought to reverse. They did it quickly and successfully by re-distributing income back to working people.