Deflation Danger

Real Time Economics points out that the threat of deflation is very real. Why should we care about falling prices? Isn’t it great when the things we buy become cheaper? Here is an example of why we should worry:

Let’s say you wanted to buy a mini laptop so you could read this blog. It currently sells for $500 but you hear it’s going on sale next month for $400. Most likely, you will wait so you can save $100. That is what’s best for you.

What if everyone who wants to buy a mini (and many other products) thinks the price is going down next month? They will wait to buy their products at a lower cost. This is great for the consumers but bad for businesses. If you are the business trying to sell mini laptops and everyone is waiting for your price to drop, your sales tank. What you will probably do is layoff people and produce fewer laptops. When more people are out of work, there is less spending since they don’t have as much money. This leads to more deflation because people will know the prices will fall even further. It will also lead to more layoffs.

It’s a scary downward spiral. Just about every economist will tell you deflation is worse than inflation (prices going up) for an economy. We are seeing this in our housing markets. Buyers are just sitting on the sidelines until there is a bottom. The problem is, there will be no bottom if there are no buyers. We would have to wait until houses are free (This won’t happen but it gives you something to think about)! Great for someone looking to buy a house but horrible for someone selling one. President Obama and the Fed have their work cut out for them.


2 Responses to “Deflation Danger”

  1. 1 janeth January 27, 2009 at 8:20 AM

    this is very true. i always wait until i can find the lowest price on something. not too long ago i waited until best buy put a sale on the new ipod touch and then i bought it. wouldn’t it be our (consumers) fault why the economy is doing bad then? if we wait until the prices are at their lowest then we aren’t helping. but then again as consumers we want the best price on something.

  2. 2 Michael Huddleston March 7, 2009 at 8:21 PM

    I don’t think too many consumers, especially the younger generation, is out price hunting- because we have learned to always want the latest gadget, latest fashion trend, we want to be current. In addition, I read that becuase the US dollar is so weak that even though our domestic GDP has suffered, our real export has increased 7.9% in the last year, according to the 2009 economics report by Chad Moutray. The increase in real exports was able to balance out the deflation we felt at home. They expect to see an influx in small-business export companies in the future.

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