Allow me to explain…
Government statistics are showing that the inflation rate this last month was only 0.8%. It’s eerily close to zero and fears are growing that we will enter a state of deflation. We haven’t seen real deflationary figures since 2009, which was just the aftermath period of the financial disaster of 2008.
The thinking for why deflation is negative for the economy is that people will not go out and purchase items and goods now, because they might be able to get things cheaper later. This of course is a drag on businesses being able to sell their products and services and therefore, slows down the economy.
Now the government HATES deflation with a passion because it is a hidden tax reducer across the board. As taxes are a percentage of their income based on prices and profits, if prices come down, so do tax revenues.
Deflation is something the government is going to fight tooth and nail to protect from ever happening. They’ll use ‘a slow economy’ as a reason for why it’s so detrimental for society and try not to admit their real motive is to maintain tax revenue.
Things are drastically different now than years ago…
This is actually my main point that I wanted to share in this email today. It’s incomparable to make the same assumptions about how deflation will impact society and directly effect people’s standard of living today with how it was in the past. The truth is, with high unemployment, high cost of living, and less discretionary income in consumer’s pockets, people could highly benefit from prices coming down; balancing their standard of living.
The idea that the majority of people would sit back and decrease their shopping is a misnomer. The fact that the cost of living is already breaking the backs of people, with two incomes being required to just barely get by, lets me know that if prices came down, the money will still be spent and might actually give people an opportunity to raise, if ever so slightly, their standard of living.
The sad truth is, an average single income was capable of purchasing a decent size home in the Los Angeles suburbs in the 1960s. Maybe the head of the house was a postal worker and lived 20 minutes out of downtown LA with the family. It was reasonable for this person to purchase an 1,800 square foot house with 3 beds and 2 bathrooms on just that one income. They could provide a quality middle class lifestyle for the family. Over time, prices and demand continued to rise and dual incomes were necessary for a family to be able to meet the costs of maintaining the same standard of living. Although some argue that you have the same standard of living even if two people need to work to compare to how families lived in the 1960s.
Our harsh reality today is that it hasn’t stopped at the above example. Now two HIGHER than average size incomes are struggling to get by with the basics. To purchase the same house today in a decent neighborhood 20 minutes outside of Los Angeles, we are talking about a 750,000 dollar home. Two people making even 40,000 dollars each would need to come up with 150,000 dollars for just their conventional down payment and that would still leave them with a 3,000 dollar mortgage payment for 30 years. It truly is overwhelming when you think about it. Honestly, most people today even with combined incomes are not making 80,000 dollars a year. The pressure is really high and affordability in this current economy is handicapping Americans; putting them into a situation where debt and the cost of life are crushing their livelihood.
I will now repeat! American’s are not being given the luxury of having a tremendous amount of disposable income. The government’s fear of deflation hurting the American people is absolutely twisted. Inflated prices are making living conditions more and more difficult. All the government seems to care about is tax income, and the numbers that create a facade of a recovering or somewhat robust economy.
We are in a time that if people could afford things they would buy them. As far as whether or not we’ll actually see a deflationary shock is yet to be determined. I fall in the inflationary camp where I believe the powers that be will continue to print and purchase as much as necessary to never let deflation even poke its head above ground. I don’t believe America will actually see an opportunity in the near future for the cost bubble to bust.
With that being said, I wish this artificial bubble would just burst and allow people to live a much higher standard of living and for the foundation of this economy to stabilize so families could stop treading on eggshells worried about every imbalance and manipulation that could wipe out their hard-earned savings.
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Chief Editor at CrushTheStreet.com