Don Luskin
I haven't agreed very often with Jim Cramer lately. But I thought his column Wednesday, The Looming Threat of Deflation, was deadly accurate. And all the more valuable because it hit a critical target that no one else is even aiming at.
has to cure by cutting interest rates. And yet Alan Greenspan , all of the professional economists and all of the pundits talk about nothing but inflation. It's as though an entire mighty army's guns have been aimed on a target in the north, when all the while the enemy has been attacking from the south. Understanding the Menace
What is deflation, anyway? Why can no one see the deflation menace? How can I say there's deflation when the consumer price index is rising? How is deflation destroying the economy and the markets? And what can the Fed do about it? Each of these is a big question. I'll take them all on in a series of commentaries, beginning here and now. And I anticipate I'll get lots of questions because it's very unfamiliar territory for most investors -- so keep those cards and letters coming in. Deflation is the opposite of inflation. And you know what inflation is. Inflation is when the central bank (in our country, the Federal Reserve) prints too much money. When that happens, the price of everything eventually rises because an excess of money is suddenly available in relation to same amount of goods. Suppose someone clipped half of the precious metal out of the gold coins he was paying you with. You'd demand twice as many coins for the same merchandise, wouldn't you? That's inflation. Deflation is the same process in reverse. It happens when the central bank prints too little money. Eventually the price of everything falls because too little money is available to buy the same amount of goods. Suppose someone crammed twice as much precious metal into the gold coins she was paying you with. You'd accept only half as many coins. That's deflation. Nobody talks about deflation because it's so rare that no one is trained to notice it when it's happening. Imperfect Lessons
We've been taught that from time immemorial, from the very invention of money itself, that the king will always clip the gold out of the coins and inflate the currency to make the government's budget go further, and to make the kingdom's exports seem cheaper in world markets. Inflation, we are taught, is inevitable. And we're also taught that deflation is impossible. What king would ever add extra gold to the coins? He'd have to be nuts. Can't happen. So we deny deflation even when we see it, as we might convince ourselves that we didn't really see that flying saucer in the sky (even if there's really one there). We are taught to not only expect inflation, but to fear it like Howard Hughes feared germs. Burned into our collective consciousness are those terrifying photographs of Germany between the World Wars, showing miserable people carting around wheelbarrows of worthless inflated currency to buy a single loaf of bread. So if inflation is so bad, and if deflation is the opposite of inflation, then deflation must be good. Right? Wrong!Find out why both inflation and deflation are equally undesirable in Part 2 of this column.
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