The Great Deflation: Coming Soon to a Nation Near You

I woke up with a sore back. Some of the cash in my mattress must have shifted over night.

As a history major I studied The Great Depression. It seems I've been waiting for The Big One for 30 years. Or maybe 65 years as I saw the impact of the Depression in action every day growing up. My dad, born in 1918, was incredibly thrifty - OK, cheap. Still is. He's almost 93 with more than enough money and still calls up and asks me to drive 10 miles out of my way and pay 2 tolls so he can save 15 cents on a can of tuna. And to show how far the leaf doesn't fall, just watch me inaction when the check arrives.

Back in my college days in the 60's I used to think: "What a relief. They put controls to stop a replay of the porno film "Banks Gone Wild" to make sure it never happened again."

Ooops. Where have you gone Glass-Steagall? - Thank you Bill Clinton and the other Blue Dog Democrats and Real Dog Republicans - sorry for insulting canines.

Now one thing about the 1930's - there was a major deflationary spiral with prices falling through the floor.

So in the late 70's with Stagflation running rampant, who would have thought that deflation was ever going to be a threat again? I remember starting to look for a house in 1978 with interest rates at around 7.5% and feeling a state of panic as rates rose along with home prices. Thus when I closed on a house on Aug. 1, 1979 interest rates were 9.5% - my friend just a few years later paid 15%. It was insane. Then came the Reagan years and I remember starting to read early warnings about deflation, which of course turned out to look crazy. But I tracked these articles when they would appear over the past 30 years.

When Japan went "Boom" in the '90's - The Lost Decade - I read everything I could. As a stock market investor, I looked with horror as the Nikkei (their Dow) fell from almost 40,000 to around 7000 (it is 9500 today.) And apartments in Tokyo were being abandoned due to the real estate bubble. Sound familiar?

Before our own tech market crash around 2000 the Dow was over 14,000 and Nasdaq was around 5000. Soon after the crash I moved all my TDA from the market to fixed, taking a big bath but have not regretted it. Ten years later the Dow is a little over 11,000 today and Nasdaq is 2450. How's that for deflation in the stock market?

After the crash of 2008, we started to hear more and more about possible deflation returning. It seems very possible. Just think of the state of labor unions in this nation and how weak they are. Who else can get wages to rise so the majority of people have money to spend? As the assault on labor has taken place, we are in much greater danger of deflation as lower spending power drives the downward spiral.

Think of just the teachers and the attempt to make pay based on merit - the few - the bell curve - while the rest earn much less. Imagine a nation of mostly charter schools where they can keep salaries down. That's the end game. Charters now pay teachers somewhat of an equivalent salary to public schools - though they demand a pound of flesh - with probably poorer health care and no pensions. When public schools with teachers represented by unions barely exist, what will these schools pay teachers? Reduce the purchasing power of millions of teachers (except for the thousand bucks a year the average teacher spends out of pocket to support their students) and the spiral is sped up. Bank failures? FDIC gone to pot? Start stuffing your mattress

Now to get a good picture of what Japan after the lost 2 decades looks like, read this Sunday NY Times piece as I post a few excerpts:

Japan Goes From Dynamic to Disheartened

Few nations in recent history have seen such a striking reversal of economic fortune as Japan. The original Asian success story, Japan rode one of the great speculative stock and property bubbles of all time in the 1980s to become the first Asian country to challenge the long dominance of the West.

But the bubbles popped in the late 1980s and early 1990s, and Japan fell into a slow but relentless decline that neither enormous budget deficits nor a flood of easy money has reversed. For nearly a generation now, the nation has been trapped in low growth and a corrosive downward spiral of prices, known as deflation, in the process shriveling from an economic Godzilla to little more than an afterthought in the global economy.
Now, as the United States and other Western nations struggle to recover from a debt and property bubble of their own, a growing number of economists are pointing to Japan as a dark vision of the future.

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Many economists remain confident that the United States will avoid the stagnation of Japan, largely because of the greater responsiveness of the American political system and Americans’ greater tolerance for capitalism’s creative destruction. Japanese leaders at first denied the severity of their nation’s problems and then spent heavily on job-creating public works projects that only postponed painful but necessary structural changes, economists say.

“We’re not Japan,” said Robert E. Hall, a professor of economics at Stanford. “In America, the bet is still that we will somehow find ways to get people spending and investing again.”

 Robert Hall? I thought he made suits. He was probably one of the optimists in 2007. He might as well start sewing now. The article goes on:

 Still, as political pressure builds to reduce federal spending and budget deficits, other economists are now warning of “Japanification” — of falling into the same deflationary trap of collapsed demand that occurs when consumers refuse to consume, corporations hold back on investments and banks sit on cash. It becomes a vicious, self-reinforcing cycle: as prices fall further and jobs disappear, consumers tighten their purse strings even more and companies cut back on spending and delay expansion plans.
“The U.S., the U.K., Spain, Ireland, they all are going through what Japan went through a decade or so ago,” said Richard Koo, chief economist at Nomura Securities who recently wrote a book about Japan’s lessons for the world. “Millions of individuals and companies see their balance sheets going underwater, so they are using their cash to pay down debt instead of borrowing and spending.”

So see the Times today about how many Democrats join Republicans in rejecting Keynes as a way out of economic downfall. Democrats Are at Odds on Relevance of Keynes

And then this: Largest Bank Will Resume Foreclosure Push in 23 States


All I want to know is: when can I get a deflationary apartment in Manhattan for around 10 grand so I can get those lumps out of my mattress?

ADDITIONS: UPDATED 5:30PM
After posting this I went on a treadmill with Paul Krugman's "The Return of Depression Economics" while at the same time listening to Leonard Lopate discuss the depression (can I multitask or not? But I couldn't chew gum at the same time)

Trying Times
Michael Perino tells the story of Ferdinand Pecora, the Senate lawyer who unmasked the financial misdeeds that caused the 1929 stock market crash, and how he forever changed the relationship between Washington and Wall Street. The Hellhound of Wall Street gives an account of the Pecora hearings that prompted Congress to rein in the freewheeling banking industry and led directly to the New Deal's landmark economic reforms.

Listen here: http://beta.wnyc.org/shows/lopate/2010/oct/19/hellhound-wall-street/