U.S. consumer prices fell in November at the fastest rate since 1932, the darkest days of the Great Depression, the Labor Department reported Tuesday, as prices for energy, commodities and airline fares plunged across the country.
The U.S. consumer price index fell by a seasonally adjusted 1.7%, the department reported, the biggest drop since the government began adjusting the CPI for seasonal factors in 1947. But on a non-seasonally adjusted basis, the CPI fell by 1.9%, the biggest decline since January 1932, at the nadir of the Great Depression…
Energy prices declined by a seasonally adjusted 17%, the most since February 1957. Gasoline prices plunged by 29.5% in November, the most since the government began keeping records in February 1967. Fuel oil prices dropped by 7.2%. Commodities prices declined by 4.1% in November…
In a separate report on Tuesday, the Commerce Department said that housing starts fell by a whopping 18.9% to a seasonally adjusted annual rate of 625,000, the lowest since the department began keeping records in 1959…
All of this is very bad news. That little hook on the apex of the graph is ominous. It means what any fool on the streets can see. The economy is grinding to a halt. The Consumer Price Index is the cost of a standard basket of goods [standard over time]. It flattened in October, and fell like a brick in November. What it means is that prices are falling and the current value of money [currency] is going up. Why is that bad?
Why would the current value of money going up be a worrisome thing? Seems like increased value of money would be a fine compensation for the majority of us who have lost a lot of money in the last few months. It’s bad because people are valuing their money more than the goods it will buy. Money itself is becoming the commodity of interest, and it’s being hoarded. So people buy less, prices fall, jobs are lost, companies fail, commerce – the life force of an economy – essentially goes to sleep. So with my "good grocery customer" discount of 10¢ a gallon, I paid $1.16 a gallon to fill up my truck today at Krogers, and that’s a bad thing [even though it felt good at the time].
Economists call a sustained fall in prices with a concomitant rise in the value of money a deflationary spiral and cringe when they say it out loud. It happened in the Great Depression, and it was the nightmare that we had trouble waking up from. It’s like a "black hole" in astronomy – a great big gravitational pull that consumes everything, even light. Astronomers can’t see it, they can only detect it by what is happening to nearby stars. It’s the same thing with a deflationary spiral, all you can see is the stuff nearby – like all those indexes in the article quoted here. It’s the thing that our financial Gurus try to make sure doesn’t happen by playing with interest rates – only they’re running out of rope [dropped it again today to 0.5%]:
"This is scary stuff," said Mike Schenk, an economist for Credit Union National Association. "We are teetering on the brink of a massive downward spiral. Deflation is a threat."
The worry expressed in this post is, in fact, the problem. In the face of such worry, people shut down, crossing their fingers hoping for better days, holding on to what they’ve got for dear life – as if money itself is what matters. And, of course, that’s the problem – fearful, frozen people withdrawing from the economy letting it die. The truth is that money is not what matters, and I don’t mean that in some kind of 1940’s love song way. What matters is Commerce – people exchanging goods with each other in a robust way. That’s why Obama’s "economic stimulus package" is so important. It’s only a good idea if it revs the economy back up and calms our fears. But it’s the only good idea in town. The alternative is to let nature take its course and fall into the inevitable black hole of a deflationary spiral [the opposite of the "irrational exuberance" of a "bubble"]. It’s what F.D.R. was talking about when he said "We have nothing to fear but fear itself."
So, right now, where is the enemy we can fight? It’s the same place it has been for the last eight years, in the bloc voting of our Republican Congressmen [primarily Senators]. Touting "Conservative Values" and ignoring the import of what they’re doing, they are opposing spending as a partisan power play on the grounds of saving the free market, when, in fact, they’re destroying it [further]. It’s time to err on the other side of the equation. We should be acting already, but even Bush is unable to persuade them to look at what they are doing. Our potential salvation is unfortunately still in the hands of a "few good Republicans"…
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[…] on Monday 30 March 2009 This is from my post in December 2008 [a few good republicans?…]. The worry then was a "Deflationary Spiral" [which is a very bad thing]. It’s when […]