Wednesday, August 4, 2010

The World of Financial Make-Believe

Last week while listening to NPR on my car radio was the first time I heard the word "deflation" used in conversation regarding our current economy. I was completely flabbergasted by the very notion of it. Since then, I've heard the word used several times in various media sources. According to these sources, deflation is a very real concern of the present administration and of many economists.

A simple, cursory analysis of this idea by the casual observer clearly demonstrates a fundamental problem: That is, just how completely out of touch our government and economic minds truly are with the people they are supposed to be serving.

Deflation? Are you kidding me? I find this assessment utterly repugnant. If they can really claim that the prices of goods and services are falling, then I've got to ask what reality they're living in, because it's clearly not mine. All across the board, my family's cost of living has skyrocketed. Here are just a few examples.

  • I posted here some time ago that the Bank of America credit card I've had for over 15 years lerched up from a reasonable 6.9% interest rate to over 13% for no other reason than to help BoA attempt to recoup money lost on other people who had defaulted on their credit debt. (See my post, "An Open Letter Sent to Bank of Amerika", April 2009.)

  • My health insurance jumped $70 per month in the middle of the of the contract year. Each year, when your company renegotiates health insurance costs, they invariably go up. However, this time, even after the annual increase, the insurance company increased our premiums by $70 right in the middle of the contract!

  • Food prices have skyrocketed. This spring, watermellons, a big favorite at the manor, were selling for as high as $9 a piece. (Not pesos, dollars.) Even now that they are in season, they are still seen for over $5 each.

  • The Commonwealth of Massachusetts increased its sales tax from 5% to 6.5% on virtually everything.

  • Gasoline prices, though stable lately, saw an enormous surge in prices since the beginning of this recession. Gasoline prices, when adjusted for inflation and in 2010 dollars are 21% higher than the historical average of $2.39 a gallon. Essentially, gas prices are 50 cents per gallon higher than what one would historically expect.

This last one is the one that angers me more than most. Gasoline is the prime mover in our economy. Nothing gets to stores without having been moved by trucks. Food. Clothes. Building materials. Everything you've purchased from a store in the last week was delivered to that store by truck. That means every increase in gasoline prices not only costs you at the pump, it is passed along to you in every item you buy in the form of increased prices.

Do the "experts" know what they're talking about when they say that deflation is a very real risk facing the country? I'm sure they think they do. I'm sure they did their math correctly when they punched in all those little numbers and counted all those little beans. But where they fail is that they don't live in reality. They live in "an economy."

You and I don't live in an economy. We live in our homes. Homes we have to pay to heat (and cool). Homes in which we have to feed and cloth our families. Forgive my provincial attitude, but I don't give a damn about the global economy. I care about what what problems come up my driveway. That's where reality begins and ends.

No doubt you're now thinking that I don't have a clear grasp on the interconnectedness of things. Of job markets and trade deficits. Of supply and demand. Please be assured that I do. But countries and governments and, yes, economies, are made up of individual building blocks. Those building blocks are called families. And it is there where the health and well-being of our country is made or broken.

There is a voice out there coming from the Left that says Americans pay too little for gasoline. That Europeans pay far more for gasoline and that in order to bring societal policies about that they prefer, that to "change the American people", we need to dramatically increase the price of gasoline.

Let me explain to you right now that anyone who advocates that sort of foolishness is no friend of the American people. This is going to be a surprise to many on the far Left, but this country wasn't founded as a service to those in power. This country, and my family, are not some sort social experiment for public administrators, politicians, and policy wonks. It was founded for those of us who work hard and who want to live without the constant intervention of the government. Nor do I exist as simply a link in a chain that connects large corporation to their profits.

If by scaling back my spending, by making due, and by doing my best to drive down the prices of goods and services I negatively impact the government and our financial infrastructure, then tough. I don't exist for their benefit. And I'm not asking them to exist for mine. Me and my family come first, and I expect you and yours do as well.


Glenn said...

Well said, my friend. I could go on for hours on this topic.
Companies should be able to charge whatever they want (high or low) for their goods and services. We get to decide if we are going to buy them or not. If not, then the company drops their prices or goes under. No bailouts. Thank you for playing.
I hear people on NPR all the time talking about pricing carbon based fuels so that they are no longer an viable source. INSANITY!! Kill those people with a gun. Give people an affordable option and they will use it. Nobody cares what powers their car. They care that their car can get from point A to point B at a reasonable pace, and that the power source is readily available. I'd use an electric car if it had a range comparable to a gas powered car, charging it was fast and easy, and the price was not more than other options.
I hate Bank of America with the white hot heat of a thousand suns, but they can charge whatever they want. Our job is to make them hurt and refuse to use their products. They are doing what they are doing because they can. They also think that they are invincible, just like the other financial institutions that we now talk about only in the past tense. Let's do it.
If we eliminated our trade deficit, then a large portion of the world would be reduced to third-world status. I'm not sure that's our problem. The US should not feel obligated to run itself into the ground in order to prop up other countries. Similarly, I should not be forced to spend and spend in order to keep the US economy able to give money away at will. I need my money to maintain my family. If I cannot afford to spend, then tough luck for the sellers.

John said...

The recession and the fuel costs had a huge impact at first, but as I drive and see all the cars on the roads it is less impacting. The only way to drive down rising costs is ironically... to drive less

Gleno said...

John, I would agree that the shock of the price leaps affected people "at first", but even though these increases seem to now have been quietly absorbed into people's weekly bills and expenses, it is still a FACT that the money they spend on gas they are now no longer able to spend on other things.

I find it sad that the American public is so quickly desensitized by certain things. Sure, its a testimony to our indomitability, but the negative side of that is that we find ourselves willing to be on the receiving end of pain that we can and should refuse.

Anonymous said...

So far we have only looked at part of the equation, the supply of money. But what happens if the quantity of goods available increases? What if instead of having ten items we build ten more? We now have twenty items and only $10. 00 so once again each item is worth 50¢.

This form of deflation is the good type. Everyone assumes that deflation is bad because the last major deflation that we had was during the "Great Depression" so deflation and Depression are synonymous in many peoples minds. In actuality if prices go down because the goods can be manufactured more cheaply this ends up increasing everyone's wealth.

This is exactly what happened in the late 1990s , with cheap productivity available from former Communist countries the quantity of goods is increased while the money supply increased at a slower rate.

I had to do some research because honestly, I don't have a clue about economics stuff at this level. Actually, I dont' think many people do. I think they think they do.

Anyway. Some of the drawbacks of deflations as I read it is unemployment. Deflation brings about falling wages, or unemployment, which means fewer jobs, less purchasing power... and on and on. People seeing prices drop and waiting to buy at a lower price, so again, catch 22.
I'm not sure why people think we are heading for deflation. The only thing that is going down in price seems to be Homes. But the Fed is trying to prevent that because so much money was artificially put in to home purchases, that he banks don't want to lose that money. The fake economy continues to be propped up. And because of it, I am only able to roll a CD over for 1.5% interest.
As for the people who want to raise gas prices. Shoot me now. The ONLY way to get people to cut down on something is to put a higher price on it. If it's worth something to them, they will consider it. If not, just chuck it away. It is the American way.
CC, still not able to comment without error.