The Winds of Deflation

shoppingThree economic reports Friday that should sound warning bells about deflation.

  • The Labor Department reports that consumer prices are essentially flat. Compared to August 2009, prices are up 1.1%. That’s only slightly lower than the 1.2% year-on-year rise in July. Excluding volatile food and energy, however, consumer prices in August were 0.9% higher than a year earlier. That’s below the Fed’s informal inflation target of between 1.5% and 2.0%.
  • In a separate report, the Labor Department said real average weekly earnings were unchanged in August from July, as both the average work week and hourly earnings were flat.
  • The Thomson Reuters/University of Michigan September reading of consumer confidence shows consumers more pessimistic in September than in August. In fact, consumer sentiment is the lowest since August 2009.

Put the three together and you have what could be a recipe for deflation: Flat consumer prices, weekly earnings, and hours, coupled with increased pessimism about where the economy is heading.

Robert ReichConsumers aren’t buying. They’re acting rationally. Their debt load is still huge, they’re worried about keeping their jobs, they know they have to tighten belts, and they’re justifiably worried about the future.

But for the nation as a whole, it spells even more trouble. If consumers hold back even more, prices will start dropping. When and if they do, consumers will hold back even more in anticipation of still lower prices. That means more layoffs and less hiring.

It’s a vicious cycle. And once deflation sets in, it’s hard to reverse. Just ask Japan.

Robert Reich

This article first appeared on Robert Reich’s Blog. Republished with permission


  1. says

    I think it’s funny how some people ring the alarm bells over something that has already been going on for years, thinking that they are really adding anything to the debate.

    People, deflation is here and now, has been for a while, and isn’t going away anytime soon. Deflation is also a good thing so long as the government allows the correction to occur quickly and doesn’t intervene with more spending and bailouts.

    Oh, wait … that’s exactly what they did in Japan and are doing in the US now. Oh … and wait … it’s people like the author of this article who are actually proposing more of it. Oh and wait … is it MAYBE possible that there are people in Congress who have a vested interest in having the government spend more and more money, establish more and more offices, hand out more and more money to the people who got them in office in the first place? So could it be that people like the author above will always find friendly ears amongst such people? Could that be the reason why stuff like this is put out there?

    Mark my words, I wrote this over 1 year ago

    From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.

    A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

    Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

    OK, I will just post a few intelligent comments on this rather questionable post from different redditors including myself:


    This is the phantasm monster that the left uses to terrify us into quietly complying with the much more dangerous deficit spending.

    Japan’s deflation has been accompanied by stimuli from the government from day 1. The real cause of Japan’s woe’s is not consumers waiting for lower prices. It is the overvaluation of assets due to continued propping up of markets by government deficit spending.

    We need asset price deflation right now! Until we get it we will have a moribund economy


    That’s right! Just look at the computer industry and at cell phones. Prices have been dropping constantly over the past 20 years, and people have been buying fewer and fewer devices, employment has contracted, and the industries are on the verge of dying out. Those darned falling prices, I hate ’em …


    Japan has been running on artificial government created demand since their stagnation set in. All it has done is create a permanent condition of overinflated prices and depressed economic activity.

    As a general note: The retreat from the top of bubble prices is not deflation. It is a correction and it is necessary to unlock the financial system and allow it to operate again.


    Some more information I wrote on inflation/deflation in case you are interested:

  2. says

    As usual, Reich gets to the major features of the situation.

    However, his worrier’s logic about deflation’s self-promotion (alias ‘vicious circle’ or ‘Catch 22′ or ‘positive feedback’) holds equally well for inflation.

    Yes, up to a point empirical observation agrees that deflation promotes further deflation: as prices drop buyers keep postponing in anticipation of further drops, thereby lowering demand, thereby forcing vendors to lower prices. However, similar self-promotion -equally well supported by empirical observation – actually works for inflation too: people anxiously buy today, in order to avoid higher prices tomorrow; thereby increasing demand, thereby enabling vendors to raise prices.

    Either way, there are limits to the self-promotion. Vendors can’t and won’t stay in business by arbitrarily lowering prices. Consumers can’t and won’t continue demand with arbitrarily high prices. So either way, eventually a kind of supply-demand near-equilibrium is forced, and price changes get ever smaller.

    Apparently Reich prefers inflation to deflation, because for inflation (as versus deflation) near-equilibrium is at a higher level of production and economic activity and overall material wealth as conventionally measured.

    In thus preferring inflation, Reich is a conventional 20-th century (and earlier) economist. For such economists: well-being is material wealth and moreover production depends essentially only on human activity; required natural resource inputs are nigh-disregarded, being viewed for practical purposes as unlimited in quantity and not degradable in quality.

    However, for us unconventional ‘small is beautiful’ folks, including a minority of economists, less material production can mean equal or even greater well-being – and anyhow, given limitations of natural resources, less material production is more long-term sustainable. Contra Reich, moderate deflation can therefore be good news.

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