Dont buy gold. Or maybe its treasury bills and emerging market mutual funds that you shouldnt buy. Come to think of it, dont buy anything. Theres no guarantee that deflation is coming, but it seems terribly likely, and nobody seems to have a clear idea how to deal with it.
Right now, we have a serious economic downturn with high unemployment. President Obama and his economic team did the right thing badly. They reduced taxes so that people had more money to spend, handed out economic stimulus grants, and generally followed the directions in the Keynesian Economics Users Manual. Unfortunately, the total package of stimulus was too small compared to the size of the downturn, too much of the money was in the form of tax cuts, and while the Administration was able to save a lot of jobs, not many were created. Predictably (Paul Krugman of the New York Times and Princeton University predicted it perfectly) Right Wing economists have used this as the basis for claiming that the stimulus didnt work. They, and the politicians who love them, want to focus on reducing the deficit and national debt. They propose cutting government spending, using the rationale that if we dont get our debts under control, investors will lose confidence in the United States economy, and we wont be able to borrow money except at very high interest rates.
Several European nations have already taken this approach, most notably Greece, Ireland and Spain. The UK is launching its Big Society plans, which involves firing 500,000 government workers and assuming that their functions can be filled by volunteers. Possibly the newly unemployed will be willing to work for free since theyll have so much spare time. Focusing on reducing the deficit has worked so well for Greece that its bonds are now paying over 10%, which doesnt show a great deal of investor confidence.
Some pundits and moralists anticipate that focusing on reducing the deficit and shrinking government is the key to prosperity, and the Heritage Foundation is arguing that none of the deficit reduction programs being proposed for the United States are strong enough.
Still, other investors see these plans as something less than a new age of riches and are preparing for a period of deflation. In deflation, theres less money being spent, and so prices are forced down, making the value of money go up. The unemployed and poor have no money, so they cant spend. People with jobs are insecure, so they cut back on spending. Banks wont lend, because the value of collateral is going down. Companies may have lots of money, but they arent spending it because theyre waiting for the economy to recover. The government doesnt spend because congress wants to balance the budget and cut the size of government.
As the customer base drops, the first sign is that prices go down, in order to attract the few customers remaining. Then, some businesses cant survive on lower margins, so they close up shop, leading to more unemployment. Eventually, the economy just gets into a trough and stays there.
One of the writers on Motley Fool has a list of stocks that should do well even under deflationary pressures, but hes an optimist. According to some advisers, there are no safe investments, not stocks, not bonds not commodities, since demand will be down for everything they recommend selling out now, and getting everything in cash. Maybe there will be a market for pillowcases and mattresses, because the banks wont be safe either and the FDIC will be eliminated as part of the program to shrink government.
Based on current attitudes, thats where were heading. The conservative mantra is you cant spend your way out of a recession when in fact thats the only way to get out of one. Sooner or later well get desperate and try stimulus again, but its hard to tell when that will happen. In the meantime. prepare for the worst although there doesnt seem to be any way to do that.
Sam Uretsky is a writer and pharmacist living on Long Island, N.Y. Email firstname.lastname@example.org.
From The Progressive Populist, December 1, 2010
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