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Inflation, Deflation, and a Depression... Really?

Written By: Phil Davis

If you have spent any time watching the financial markets over the last several years, one thing should stand out to you: the so-called experts and economists - the talking heads - cannot agree on what is happening to our, the US, economy. All the usual indicators are pointing in different directions. Unemployment is down, but there are many long term un-employed, still seeking a job that replaces their prior position. When there are job openings, they seem to be either for specific skilled worker or of a low caliber, and many times temporary, as in stocking shelves or flipping hamburger and making burritos.

Inflation is reported as low; yet our wallets and purses are telling us they are running out of cash, sooner than later. Is there some hidden inflation, or is the federal government misrepresenting the inflation numbers? Some food items, such as beef, have soared in price, while grains have plummeted over the last year; so you can see the confusion - meat eaters are complaining of inflation while a vegetarian loves lower prices.

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The stock market - even with the recent volatility - is making new highs as the average American income has not even reached where it was before the so called “great recession,” leaving most of middle America wallowing in the new phrase of “income inequity” - in other words, a few are doing really well and the rest, the majority, are not.

So what is the real problem?

First, I am not a trained economist, financial expert, an expert in anything, or even a horse whisperer. I am just a guy who watches things, forms opinions, and - I don’t know how to say this modestly - is usually right. So here is my answer, at least the answer as to what the problem is.

We have been, and probably still are, in a “Depression.”

When I use the “D” word around many friends and experts, I receive the howls and laughs as a hack or even an idiot, because the definition of a depression is not even close to what is going on...they say. And they are correct, to a point, the classic definition of a depression is (as cited in Wikipedia):

  1. A decline in real GDP exceeding 10%, or
  2. A recession lasting 2 or more years

Another way of defining a depression is the cost of producing something is more than its value. Or, we can simply say a depression is a period of falling prices. So when looking at these definitions I do seem to be a fool, or am I?

It seems whenever the “D” word is used, we only visualize the Great Depression of the 20th century and nothing more. Allow me to rephrase that last sentence; we have been trained not to use the word depression because the government has told us they have fixed the depression problem - so we will only now have great recessions.

In the centuries prior to our terminology change, the word “panic” was used to describe a financial crises, as in the “The Panic of 1837”

The Panic of 1837 was an American financial crisis, built on a speculative real estate market. The bubble burst on May 10, 1837 in New York City, when every bank stopped payment in gold and silver coinage. The Panic was followed by a five-year depression with the failure of banks and record high unemployment levels.

That sounds eerily familiar, doesn’t it? In our modern world, using the word “crash,” is just not going to be used since we have grown beyond these simple and archaic definitions. We now prefer terms such as recessions or great recessions to describe financial downturns, which act to mute the hardships that will lie ahead. In other words, they are not as scary sounding.

The hard truth is, we indeed did have a crash, there was a panic, and it rippled through the financial markets. Liquidity of assets were in jeopardy, corporations feared they may not find the cash to make payroll, lending stopped, large institutions as Lehman Brothers, Bear Sterns, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, Citigroup, and AIG went bust or had to be infused with new cash from the government or forced into “shotgun” mergers with other institutions.

In that period of 2007-08, all our leaders, financial and political, where in a state of panic and shock, unable to find solutions other than bailing out the fallen, the weak, and finally purchasing all the bad debt, along with other confusing assets and schemes through the Federal Reserve Banking System (the Fed). To this day, on its balance sheet, the Fed still has all these assets; assets purchased with new money, invented to a total of $4.447 trillion from $869 billion before all this fun began in August of 2008.

I also point to people, respected people, who believe the same; they are the outliers, the original thinkers who look beyond the spin and hype dictated by government, the mainstream media, and those who have powerful and lucrative positions in society. One such man is J. Bradford DeLong, a professor of economics at the University of California Berkley and a Keynesian economist - one who believes throwing a lot of money at a problem will fix things (my definition, a more complete one can be found at Wikipedia) - who acknowledged this in August 2014:

By 2011, it was clear - at least to me - that the Great Recession was no longer an accurate moniker. It was time to begin calling this episode “the Lesser Depression.”

Another individual - who seems to be a truth-teller - is Larry Lindsey, who was the assistant to President Bush on economic policy. You might remember this man, he was fired for telling us that the Iraq war was going to cost far more than Defense Secretary, Donald Rumsfeld, estimated the cost to be; too bad for us. Here are some interesting numbers he produced, which I believe, point to a depression, at least for most of us:

US Household Net Worth 2007- 2013

  • Top 1% Up 1.9%
  • Next 9 % Up 3.4%
  • Next 15% Down 0.5%
  • Next 25% Down 16.7%
  • Bottom 50% Down 44.2%

Those simple numbers point to one thing: the policies of the Federal Government and the Federal Reserve Bank have only helped the top 10 percent of the population. That help came in the form of a continual supply of new money into the financial system, or from the money tree growing at the secret orchard.

One other person in my cache of support is Jim Rickards, author of The NY Times bestseller The Death of Money and national bestseller Currency Wars, who sent this Tweet a few days ago:

Back in the USA Editorial by Phil Davis: Inflation, Deflation, and a Depression...Really?

So clearly, I am not a lunatic spewing garbage financial advice around, frightening the American populace with the outdated, fanatical, “D” word our government and some economists would like forgotten.

In the past - as Mr. Rickards pointed out in his Tweet - pumping money into the financial system as we have, would eventually lead to inflation - but it has not. Interest rates continue to go down, and in Europe, they even have a negative interest rate. In other words - you may have to pay the bank to deposit money with them (if it is a large amount); how twisted is that? No one can even talk about higher rates without upsetting the markets, let alone actually raising them.

This is not what inflation looks like.

The other deflationary cause are from the “disruptors” - as I call them - the industries or organizations that throw a wrench into our individual income streams - the Walmarts, the Amazons, and all the other self-serving fraternities who tell us cheaper prices are better. It is one thing to get a good deal, and entirely another to price out whole industries and jobs by colluding with “The Cheap” (hopefully a term you now understand as supporting and creating products from low wage countries).

Even a few weeks ago, Walmart admitted they have some problems:

“Wal-Mart cut its forecast for sales growth in the current fiscal year to between 2% and 3% from a previous range of 3% to 5%, citing lower food-stamp payments and a stronger dollar, which eroded overseas gains when translated into its home currency.”

Allow me to translate this paragraph:

“We have been killing our customer base because we have destroyed their jobs here at home; even their food stamps and other federal assistance programs will not help us now. We are screwed.”

One other disrupter that has to be acknowledged is the internet itself, the thing you are using to read my thoughts. It has changed how we do business, and it certainly has disrupted particular industries - for example artists and others it has been a disaster - unless you were established before the internet. An example of what I mean comes from a recent interview of Gene Simmons of the rock band KISS during a CNN interview:

"...thanks to a crumbling business model, including 'file-sharing and downloading' by fans who believe they 'were entitled to have something for free' -- rock is finally dead."

"I am so sad that the next 15-year-old kid in a garage someplace in St. Paul, that plugs into his Marshall and wants to turn it up to 10, will not have anywhere near the same opportunity that I did," Simmons said. "He will most likely, no matter what he does, fail miserably."

So how do we as a nation overcome this ongoing crisis?

Several things will definitely help, for example:

  • making the tax code simpler for the individual
  • create a more tax friendly corporate tax code
  • once and for all, create a national energy policy, and
  • really make efforts to reduce our national debt.

But, to you and me, the average person, this is just more blah, blah, blah...another talking head repeating the same outmoded lines that never go anywhere.

Much of the answer lies in our own consuming habits. We are the most powerful consumer - as a group - in the world. This fact alone is the reason the nations of “the Cheap” are constantly peppering us with their goods, knowing we have a disposable income to support those extra items not used just for our personal survival.

When we consume correctly, we are one more notch in the overall “fix” that is desperately needed. One that Washington and big business have no real desire to address. What do I mean by “consuming correctly?”

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One example is how I grocery shop. I buy only local chicken, Red Bird Farms, to be exact - a Colorado company. I am not going to buy the big brand names, which raise the animal inhumanly...then ship it to China to be processed. I am not going to buy any Chinese chicken products now that the FDA has allowed them to flow into our food chain. I am going to buy from a company I know and have trust in, which in turn keeps my cash flowing locally, and my local economy churning.

The above is just one small example of “consuming correctly,” and as you think of your own shopping habits, I am sure more ideas will pop into your head. This is the same principle as buying American products, just a little smaller version, and it will benefit the whole nation as more and more of us sign on to this way of thinking and shopping.

A question(s) I often ask individuals: do you think your vote counts on the national level? When you vote for a President, are they the same person in office as they were when campaigning? I hear “no” screaming through my keyboard!

But your cash, your money in your wallet or purse, your credit cards and checkbooks, all stay the same - they do not change. They are waiting and available for us to use at any time for anything, to make a purchasing decision. Hardwired into those dollars and check book balances, is a power far superior to any voting we may do for a President or even a Senator. We, as a group of consumers, can sway political thought and direction just by this power alone - our buying power.

Use it wisely; it may be the only power we have left.


Other Articles of Interest:

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Hometown Hero: Guy Stephens-Ex-POW/WWII Battle of the Bulge

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A Son's Tribute to an Amazing Father: "And That's All There Is To That"

Cotton Products "Made in China:" Is Your Baby Safe?


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