Thursday, October 30, 2014

We Want Deflation, They Don't

There are great scientific laws of motion from Isaac Newton, which I feel can pertain to our own economics and the economy as a whole.
- For every action, there is an equal opposite reaction.
- An object in motion will not change velocity unless an external force acts upon it.
If one were to inject the two principles into the economy, one would realize that they work well with the concept of inflation versus deflation.
Deflation
is the absence of price increases.
Inflation
price increases are present.
I feel that the current climate of deflation in our economy is a result of Newton's first law. The stimulus from the Fed and our government policies are suffering from the equal opposite effect of their actions. This is a good thing for everyday citizens. Deflation offers two great economic benefits: price stability and it lowers the cost of living which raises your standard of living.
Our government and the Federal reserve hate and fear deflation, however they have used the concept to allow them to stabilize our economy, so that they can resume their policy of price inflation. This is why I declare that we need a new political party that is for the people. The two parties in power violated the constitution by creating the Federal Reserve and the guiding principle of the founding fathers, "To promote the general welfare." Let's put this into our everyday experiences.
Everyday people seek to avoid inflation in their lives. We skip steak for hamburger and now, we cannot afford burgers, so we eat chicken. We do this so we can pay our other bills and needs. The people that we elected institute policies that raise prices, even argue the benefits of inflation, regardless of the pain it causes to its citizens.
Consider Newton's Law
The Fed injected money into our system. This is not wealth created from a contribution to society like electricity and the industry that resulted from the invention. This is diluting the value of our currency and lowering our standard of living. This action is inflationary. The reaction to this policy is deflation. Hold that thought.
Flashback: 2002
Prior to the recent Fed action of pumping artificial, worthless paper into our economy, they kept interest rates low which also applies to the second law of Newton.(an object in motion...)
Housing is the biggest purchase in our consumer society. The stock market caused a crash with the dot.com bubble of 2000. The Fed came up with the idea to boost the economy through housing, but it was stagnant, a body at rest. By the lowering of interest rates, added with a stronger dollar during that time, together formed a stimulus to the housing market.
Let's Get Real 2002:
I'm selling my home for $100K. You can buy it with a payment of $650. per month before the boost. Now, with the Fed's help, it only cost $450. per month. Anyone with an IQ of 80 can pick the $450. a month deal. That dear reader, is deflation.
The Fed used deflation to start the housing bubble and it is again using deflation to reignite it.
Let's Get Real 2014:
Today, the government injected refinance programs like HARP, bank modification deals under the threat of law suits and the Fed helped by lowering the interest rates to below 4%. Now, that $100K home is selling for $200K. They did this to stop the bleeding of price declines(deflation and Newton's first law)and foreclosures. My home has a house payment of $1100. per month at the already historical low rate of 5.5%. Now, it drops to $700. per month because of all the manipulated policies. Same house, but now, using deflationary forces. I have money to spend, but don't get thrifty. No policies for the savers and investors in society. They want you to spend that money.
Deflation has a bad side too. If prices continue to decline, people put off purchases in the hope that it may decline further. This can spiral into a negative consumer cycle, which the Fed fears. However, we have never had an extended period of price deflation, to which the Fed claims will happen.
There are examples of industries where deflation has hurt like mining companies at present. The decline in price of the end product, gold or silver and other commodities like copper, results in the difficult decision to close the mine until prices rise because the break even point has passed. Jobs will be lost not only at the mine, but equipment companies and anyone and everyone connected in those regions. The government doesn't care because this segment is not part of its big picture.
On the flip side, price stability of deflation helps citizens. Even if you don't own a home, think oil. You now pay $3. per gallon, whereas before you paid $4. per gallon for the same amount of gas back in January. You are saving for the first time with whatever wages that you earn. Your living standard will rise. You can afford steak.
This same aspect of deflation helps businesses too. It lowers their costs. This is why the stock market climbs. With lower costs, businesses have more money. However, they have used this opportunity to buy back stock rather than developing new product.   
Finally, it allows debt to be restructured. This too lowers cost, leaving more money available after fixed payments whether credit fees, inventory loans or mortgage payments.
The Fed and our government sponsored deflation only because of the financial crisis of 2008. They feared that their policies would implode the system. However, they have society trained like seals. They have plenty of examples to verify. All they have to do is make some announcement to check the pulse. Now, they can return to their big picture because there is house price stability along with rising prices. This is the same formula that the Fed has been using since 1957 after our economy suffered its first haircut. They have us on a staircase. We have just paused on a step. They would like now to resume the price escalation of inflation because they need revenues to cover the debt load that they brought onto our society. These are the policies that erode the middle class, cause inequality in society with hardship under the destruction of the dollar. This loss of purchasing power results in a lower standard of living and it all can be traced to the Fed in 1913. However, we have hope in the fact that Newton is smarter than the Fed or our government leaders. There will be a reaction to the action of the Fed, even if it is painful as we can all pray that we return to the wisdom of our founding fathers to back our currency in gold which will promote the general welfare. This is why I say, End the Fed!