Monday, Jan. 23, 2009 | I wanted to thank Rich Toscano for writing about deflation (Part I is here. Part II is here.). It’s an important issue and I hope people will read his commentary and try to form their own opinions.
While there are many, many causes of the financial crisis, the general financial illiteracy in this country is surely one of them. The United States is the largest economy in the world, but few of its citizens understand it. Most don’t even try.
To that end, I’m writing to present the counter-argument in support of deflation and I do so in the hopes that more readers will join the discussion.
First, I take deflation to mean a general decline in prices. We don’t have to look far to see tangible evidence of falling prices. Housing prices, as Toscano has well documented, have plummeted. Gas prices are down considerably. And local stores are advertising all sorts of deals to induce consumers to spend, spend, spend.
Those are major sectors of the economy that are experiencing huge contractions. Best Buy put it best by saying it is witnessing “seismic changes in consumer behavior.”
After an orgy of consumer spending, Americans now are becoming a nation of savers. That’s bad news for our economy because 70 percent of the U.S. gross domestic product derives from consumer spending.