Obama: 'Millions of jobs' in danger next year, page 4

The problem with falling prices is that there are two sides to everyone's story: The side the spends money and the side that earns money (or gets it from someone else's earning).

Sure, falling prices may be good from a spending perspective, but from an earning perspective they become disasterous. Your bread may be cheaper, but imagine you work at the bread factory. Over there, because prices are lower they are getting less money flowing in, so they have to cut costs, which usually means laying off people. Then those people out of work have less money to spend, which means more prices falling across the board, and thus more people losing their jobs in other businesses, making the problems worse, etc. Soon you have millions out of work in every industry and trade, and nobody spending anything. Industry grinds to a halt, money vanishes into thin air. This is a "depression."

The problem gets worse when you consider debt. If you have any debt, inflation is great because it "melts debt away." Many people bought houses in the 1970s for, say, 50 K that they could (until recently) have sold for 500 K. Meanwhile their mortgages remained the same over all those years, even though the value of their house went up ten times. So when they sold, they reaped huge rewards and profits. But if prices are falling across the board, it becomes harder and harder to earn the money you need to pay off your debts. Rather than melting, in deflation, debts become ominous, doubling or tripling or more in terms of how hard it is to pay them off. Think about how much debt there is right now: Among consumers, businesses, and the government. At every level, the globe is drowning in debt. This makes falling prices much scarier.

It seems funny to many to talk about deflation because we see so much news about the crazy amounts of money our government is creating and giving away: 200 billion here, half a trillion there, etc etc. However, at the same time there is massive loss of money in the stock markets, the housing market, and other forms of investment/earnings. Right now, it looks like more money is being destroyed than is being created. Something like $10 trillion has disappeared from the stock market since the beginning of this year. That's more than all the government bailout money so far, many times over. When you factor in the real estate market and international markets, (never mind derivatives, which is still a frightening unknown even to the "experts"), the picture is even grimmer.

So, although the debate is still raging, it looks like deflation, rather than inflation, may turn out to be the real problem next year and beyond.

[edit on 23-11-2008 by silent thunder]