WHATS ALL THIS TALK ABOUT THE DEFLATION?

the FED has begun discussing deflation on a regular basis. the entire group of FED officials have stated many times that deflation is not an issue for the US, but if it were to be an issue, they can fix it. used to be inflation was the primary concern but now that we are mired in a recessionary enviroment, deflation has become a focal point. the FED has jaw-boned us to death about how deflation wont happen in the US because of all the tools the FED has to defeat it. yet each governor and mr. greenspan himself have said that the onset of deflation can be hard to detect and can get out of control very fast. the most recent FED official to comment on deflation was roger ferguson. "i do not believe that the US is at the brink of significant and sustained deflation. i believe that the probability of such an eventuality is quite low. but as the japanese experience shows, the onset of deflation can be unexpected." ferguson went on to say, "preventing deflation remains preferable to reversing it, however, if an economy slips into deflation, my belief that a sufficiently determined central bank can spur aggregate demand and end the deflation." so we can all rest assured that even though deflation is hard to detect and its onset can be sudden the FED can and will reverse it when and if it shows up. whew. good thing they are on top of this.

deflation, the prolonged decline in prices of most products and services. if dollars are the ultimate store of wealth and financing is the ultimate source of funds, then deflation is upon us. when the FED lowers interest rates, that reduces the "cost" of money and in turn the cost of anything you buy with that money. when the dollar loses value against other currencies, that reduces the "buying power" of that dollar. interest rates have been falling for over 2 years and the dollar has been declining in value for the last year. both of these deflationary forces have created numerous economic results most of which are not good.

since interest rates are low, the cost of owning a home (and many other durable goods) has decreased. that in turn allows home values to hold steady or rise as its cheaper to "carry" or afford the home. good for the short term, but dangerous for the long term, as those rates will ultimately have to go up again. another example is in automobiles. if the car price stays the same but the cost to finance it gets cheaper, the result is a lower cost to own the same priced car. if rates were not low, the cost of that car would need to come down to keep demand stable. same with homes or anything else that can be financed.

as for the dollar losing value, thats a bit more complicated because with the global economy, FX fluctuations have many effects. suffice to say, a lower valued dollar makes imports more expensive in the US (making US goods relatively less expensive) and exported goods less expensive overseas. implications for the dollars valuation are widespread, but for some reason our government says it committed to a "strong" dollar policy. or in other terms, our government wants the benefits of a weak dollar but the prestige of a strong currency.

so even as the FED pledges to watch and act if necessary, they themselves continue to foster an enviroment of lower cost of money and lower valuation of the dollar. both of which do nothing to fight off further deflationary forces.

have a grateful day!
larry