Op-Ed: Deflation or death? Take your pick.

Shelter and gasoline were responsible for a large part of the monthly rise in prices – Copyright GETTY IMAGES NORTH AMERICA/AFP Brandon Bell

We live in an economic environment that doesn’t understand its own messages. It knows how to misinterpret those messages, but never seems to understand that spinning them is dangerous. Prices are insane. Inflation is used like an incantation to pretend that rampaging debt is good. That sort of thing.

For example:

Prices are X amount higher than they were a few years ago. Those prices were great numbers back then. Everyone was doing fine, according to themselves. Then the prices went absolutely nuts. That was good, too, great return on investment, they said happily.

Now, not very long later, the entire global economy is looking decidedly queasy. Main Street is full of people living on the street. Prices are still rising. Affordability is a really bad word.

Meaning that no amount of spin has had any effect on the economic realities. These massive price increases destroy wealth very quickly, leading to some rather strange situations and perspectives.

The finance sector, and to their eternal disgrace, major league economists, the kind people listen to, have been banging the growth drum for so long. They don’t know anything but growth. This global disaster is the payoff.

They’ve forgotten who they are and what they’re supposed to be doing. One of those things is navigating economies away from cliffs.

Economists, historians, and many academic masochists all agree that money was worth more “back when”. Ponderous tomes babble about asset values and marvel at the fact that people bought incredibly valuable future assets with accessible amounts of money.

Simultaneously, they manage to avoid admitting that money is only worth what it can buy. Right now, that’s a lot less than it was 3 years ago. Message received? No.

They were wrong in the first place about growth. Out of control growth is largely responsible for the unfathomable amounts of debt now suffocating people, businesses, and economies. The price rises have made the debt issues much worse.

The finance sector should know better, too. If its debts become unmanageable, it’s a suicidal position for banks, lenders and investment markets.  

Governments are arguably worse than all of them. Having gutlessly agreed with their absurdly rich owners that nobody should pay the taxes that provide their revenue, they have to borrow. Hence huge government debts.

Politicians continue to demand tax cuts when governments are effectively broke. They then demand cuts in spending to pay for the tax cuts. Every so often they wonder why government contracts and services dry up. Roads, schools and basic amenities don’t do well.

Add massive price spikes to this very thorough systemic stupidity, and you get the current picture.

This is where deflation comes in. if you expect anyone to buy anything, they have to have the money to buy it. Credit is the difference between what you have and what you can persuade yourself you can afford. At some point, credit doesn’t work anymore.

Prices are also sacred cows in business. They reflect how well you’re doing while going broke. Every business is poleaxed with related sector cost increases as the sectors try to balance their books. What goes around tends to come around all at the same time. It also tends to come around a lot faster than you’d expect.

There’s also a lot of padding in those “great numbers”. They pay the people who always seem to be doing very well while doing nothing but picking up a phone occasionally. A lot of people have vested interests in these high prices.

These are yet another geological strata of middlemen. They’re on the way out anyway when AI comes in, but they’re obstructive. They will try to maintain high prices in the name of their own personal rackets. It won’t work, particularly not in a meltdown, but they’ll be dragging the chain when it comes to any sort of realism.

This is why deflation is considered a bad word. Deflation is the big monster at the crack house party. The numbers won’t look so good. That’s one of the excuses for trashing the entire global economy – Someone might look stupid.

In which case, it’s either look stupid or go very definitely broke. The private sector has done this to itself. There was no particular need for rents to rise so insanely. It was policy. Growth says, “raise rents for good numbers”. The market says, “can’t afford it” and the prices go up, not down.

All that extra money also gets pulled out of the rest of the economy, at the expense of bill payments, retail, and everything else. It’s a lousy dynamic in a severely strained economy.

The same applies to health and education. Is anyone saying, “This doesn’t work?” No, and it’s because of the acceptance of bad habits picked up over decades. The market isn’t always right. It’s rarely right, but it’s also rarely questioned.

There’s no real added value in what’s being paid for. The people are paying that much more for the same things. Does this look like a rational process to you?

Deflation is a situation where prices fall across the board. It’s a pretty strange sight when you’ve been basking in “growth” for so long. There are reasons people don’t like the word.

To be fair, when you’ve paid for something, selling it at a lower price is hardly likely to be your first preference. You have to work with your margins, manage turnover, offload intelligently, and basically do gymnastics while running a marathon. It’s hard work, but it’s definitely doable.

The wholesale market is a case in point. Wholesalers and bulk buyers work on net turnover, not unit prices. They could sell say widgets as units for a profit of $1 per unit. They don’t do that because it could take forever to sell their stock. They make 80c and sell thousands.

This methodology applies to anything from stocks to loaves of bread. It’s just a different way of making a profit on your outlay. It’s also a very competitive way of doing business, especially in tough times.

That’s one form of relatively painless deflation. You may be wondering how it applies to that revered Saint Francis of American assets, the property market. It’s doing the same wholesale thing with portfolios of assets.  

You can sell specific portfolios. You can buy and sell debt. You can try and avoid not getting into junk bond territory while you’re at it. You might even pick up some useful commercial property for conversion in the current market.

Prices are lower, but volumes make money. Margins pan out pretty well. You can sell and lose that debt while you’re at it.

OK, that’s the feelgood bit of this article. There’s a caveat:

You absolutely must know your stuff to get deflation right. Get experts, not middlemen and you’ll do reasonably well. You can’t manage falling prices like a raffle, let alone pay people for it. Deflation has to be productive. It’s like dodging a bullet. It takes some movement, but you’re not there when the bullet arrives.

Oh, yeah.

“Deflation or death.”

The choice is an economy based on prices which can’t work at all. Banks were crashing without this level of pressure. Do you want to find out how that feels? Probably not.