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[bobf <bobford79 AT yahoo.com>]

>From the editorial board of today's NYT.  Many people are worried about 
>fututre inflation and some are hysterically claiming hyper-inflation.  But, 
>for now, deflation really is the big worry; and it will affect everyone, 
>including the more self-reliant than average people, homesteaders or 
>otherwise. 

 At its simplist, deflation is dollars chasing the same or too many goods 
while inflation is the corrollary of  dollars chasing the same or too few 
goods.  Inflation is probably 'down the road'.  Hyper-inflation is slightly 
'possible' , also 'down the road'.  And no one with any knowledge can claim 
they know if 'down the road' is six months or 16 years.  People can ,and do, 
guess, and some guesses are eudcated and others aren't; but, they are all 
guesses.

Deflation is occuring now, it started with real-estate and is expanding 
quickly into all parts of the economy.  Even if you don't have debt, 
deflation can cause you great harm.  I have zero -debt.  I have had zero-debt 
for most of my life, but this deflationary cycle has hit me like a 
sledgehammer.  I am not unique.  The article gives some brief explanation of 
the danger.  Some of the reader's comments are interesting.  Most of the 
people commenting just do not under economics well enough to see the bad part 
of the picture.

oh well. if you are interested, take what you will.................

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December 19, 2008, 6:21 pm 

Something New to Worry About: Deflation

By The Editorial Board
Hundreds of thousands of people are being laid off. The nation’s leading 
banks and carmakers need bailouts. The stock market has had an ugly 2008.

Well, here’s something else to worry about: deflation. This week, the 
government announced that prices fell in November for the second month in a 
row. 

It might seem hard to understand what the problem is with falling prices. If 
all they mean is that we can buy our Christmas presents for less this month 
than we could have a month ago, maybe we can get the decked out Mac after 
all. What’s there to worry about?

A lot. If prices persist in their decline, they could be devastating to the 
economy — not primarily because of their impact on consumers’ spending habits 
but because of their impact on consumers’ ability to service their debts. 

Think of it this way: Say you earn $50,000 a year, and have a $200,000 
mortgage. If there is heavy deflation, prices and salaries fall. Your salary 
might go down to $40,000, but your mortgage would remain the same. Suddenly, 
making those mortgage payments has gotten a lot tougher.

American businesses need to service about $11 trillion in debts, according to 
the Federal Reserve, a task that will become more difficult as falling prices 
eat into their meager profits. Households owe $14 trillion — which will 
become a more onerous burden if businesses cut salaries to bring costs in 
line with falling revenues or — far more likely — fire more workers. 

In 1933, the American economist Irving Fisher argued that depressions are 
caused by a chain of events from over-indebtedness to deflation that goes 
somewhat like this: 

Banks concerned about their corporate customers’ indebtedness demand debt 
liquidation, which forces firms to sell off assets at fire-sale prices to pay 
them back. 

Money in circulation declines as banks hoard the dollars, which causes 
spending to drop and prices to fall, depressing businesses’ net worth and 
profits and throwing many into bankruptcy. 

Production is cut; workers are laid off. This deepens pessimism and leads to 
more hoarding of money.

This chain of events looks strikingly similar to our current predicament. 
Banks aren’t lending, businesses are failing, jobs are being lost and — since 
November — prices are falling.

What to do?

Ben Bernanke, the Federal Reserve chairman, got the nickname “Helicopter Ben” 
after a 2002 speech in which he argued that the federal government could 
defeat a deflationary cycle by flooding the economy with money — even if it 
meant taking up Milton Friedman’s suggestion from four decades ago that the 
government simply drop cash from helicopters.

(You can read the 2002 speech here.)

The Fed has begun doing that — in a way. Its committee that decides these 
matters has agreed to start pumping more money into the economy.

If deflation gets worse, who knows? Maybe Mr. Bernanke will be manning his 
helicopter.

http://theboard.blogs.nytimes.com/2008/12/19/something-new-to-worry-about-deflation/