Perry Glasser

Not So Stupid: Staring Down Deflation

In Economics, Personal Finance on December 17, 2008 at 8:57 am

In the aggregate, eventually, we wise up.
Citizens can be impulsive. Each of us from time to time has suffered buyer’s remorse. “What was I thinking?” we ask as we stare at the turquoise jewel-encrusted porcelain elephant in the living room.
But while one of us may buy the elephant, most of us do not, and in the presence of accurate information, so-called transparent markets, even Beanie Babies deemed “collectibles” by marketeers lose their luster and are thrown on the scrap heap.
RATIONAL BEHAVIOR
For at least a generation, solons have wrung their hands at Citizens with the temerity to run up debt. Every year, the total debt being carried by individual investors grew larger.
Buccaneers directing industry (but with no operational responsibility) awarding themselves millions in bonuses, salary and perks, self-proclaiming their services indispensible and thus justifying compensation greater than the GDP of Haiti, moaned in terror. Mind you, terror prevented no Buccaneer from issuing non-secured lines of credit to the uncreditworthy. Wizards (perhaps now to be called “Madoffs”) on the porch of ocean view homes in the Hamptons clucked in disapproval at Citizens borrowing a few bucks to live a decent life. Their disapproval did not stop their invention of evermore financial products based on non-assets and intangible assets, and offering them as leveraged opportunities to Citizens. Weasels, in league with those same Buccaneers and Wizards, ran both left and right, simultaneously admonishing Citizens to the values of thrift while running up national debt to nosebleed heights and nearly succeeded in turning Social Security into a perpetual revenue stream for Wizards with a Georgie Bush plan called “privatization.”
Boy, wouldn’t that have worked out well?
But Citizens ran up so much personal debt because they are in the aggregate, sensible. If the price of a house, car, television or goldfish today is less than the price will be tomorrow, you’d have to be an idiot to delay the purchase. In an inflationary environment, today’s debt is paid with tomorrow’s dollars, and if tomorrow’s dollars will be worth less than today’s, only a fool would delay.
DEFLATION
What if Citizens believe that tomorrow’s dollars will be worth more? Why buy a house today if the price next month will be significantly less? What fool would take money from his pocket today to pay $10.00 for an object or service that next week will cost $9.00?
Once again, the solons are wringing their hands. The cessation of discretionary economic activity is just rational behavior by Citizens.
Watch that word discretionary.
Citizens will continue to eat; we will continue to care for our children; we will continue to consume medical services.

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