Deflation

Deflation is a decrease in the general price levels. So paying less money for something is good, right? Not exactly. Deflation is connected with the Great Depression. Who wants to see that again? We are used to seeing inflation and worrying whether our annual income will keep up with everyday prices. Now we are actually seeing prices decline. At first glance this looks almost as good as gas under $1.50 per gallon. In reality this is bad for the economy. Lower prices gives companies lower revenues. This results in companies laying employees off and thus further weakening the economy.

It has been understood that the Fed feels deflation is not much of an issue at this point. However, low interest rates help combat deflation by encouraging consumers to borrow and then spend. When spending increases, so do prices. Increasing prices results in inflation and gets rid of deflation. The Consumer Price Index (CPI) has declined for the second straight month signaling deflationary issues. Short-term Treasury yields have been pushed to zero and even negative in some cases. The uncertainty of the economy right now has led people to actually paying the government to hold their money. Seems risky to me since lately the government has been spending all our taxes. At any rate, if deflation issues strengthen, we can be rest assured that low interest rates are one step the Fed has already taken that could help out in the near term. Who knows, maybe it is all we need to combat deflation.