Nadine:
There are much brighter lights than I who can do a better job of answering this question, so I encourage other thread participants to add to the following comments.
To begin with, one should question the inflation figures provided by the government. In a nutshell, they are misleading. The formula used to interpret inflation has been changed three times in as many years, each time in such a way as to minimize the apparent inflation. Notice the use of "less food and energy". What a joke. Hard to live without eating, and energy costs move into virtually every item we acquire. It would be impossible to list all the items that have moved up substantially in price over the last two years, so obviously the fact that the government figures don't mirror this should suggest something to all of us.
After the Asian collapse, the only route back for virtually all of these unfortunate nations was to export to the only remaining consequential buyer of goods, namely the U.S. As their currencies had been ravaged, the cost of their goods in U.S. dollars was dramatically reduced. Fierce competition for the American buying dollar has kept prices of these goods down. This competition has also reduced the pricing power of American goods producers to nil.
Exacerbating this situation is a continuing worldwide glut of manufacturing capacity in just about anything you can name. Much of this capacity is very modern and very efficient. Unfortunately, most of it also carts huge debt loads, which translates into continued production, even as prices tumble due to price wars (as each attempts to at least cover the carrying costs of their debts). Price wars are most intense in consumer goods, which keeps the apparent inflation in this area from really accelerating.
As an aside, while many think that deflation and inflation are mutually exclusive, this is not true. We can be forced to endure both under certain circumstances.
Central banks will always try to inflate their way past the deflationary cemetery, and Alan is certainly active on this front. Unfortunately, this very act does little other than postpone an increasingly ugly day of reckoning. In my judgement, that day is not far off.
Best, Earlie |
