Tomorrow We Dance To Freedom






Deflation Is Nearly Upon Us

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The preeminent factor that we deal with on a day-in-day-out basis is uncertainty about the future. We're constantly analyzing our endogenous family finances and correlating this to exogenous stimuli in deriving subjective opinions about our perceived wealth, state of the economy and general well-being. Therefore our level of consumption (spending) is not simply determined by our money wage rate but also by our perceived current wealth, and limited understanding of the future. If we find ourselves struggling to maintain our previous standard of living with a stagnant or declining money wage rate but perceive ourselves as being wealthy based upon our imperfect knowledge of the income of others we might borrow heavily (obtaining a 2nd mortgage or buying that larger house) with the expectation that our future prospects for enhanced income will be met.

Internal to our own analysis of situations we may be perfectly rational in our actions even though others external to our decision processes may construe our actions as being completely irrational. The basic premise is that the propensity to consume is not some statically calculable definitive value but based upon the subjective decisions of many households in the aggregate. Therefore the economy never reaches the equilibrium imagined by the neoclassical economists but is constantly in a state of flux - a perpetual disequilibrium.

Even investment decisions are based exclusively upon the prospective yields that are expected instead of the interest rate at which these yields are capitalized. On a day in day out basis businesses and speculators make judgments about how the exogenous and endogenous factors will affect their investments more from a subjective standpoint than through econometric 'objective' analysis that factor in the various stimuli into flawed neoclassical models of an illusory economic system. Employment decisions made by businesses are also ultimately forged in the subjective 'fires' of perceived endogenous (current financial condition, orders, etc.) and exogenous events that have occurred recently and are currently transpiring.

Aside from the interplay of perception across all households, businesses, and government an additional variable has become more prominent in recent years. This is the 'corrosive' effect that business power players (business elites) have on perturbing the economy through their direct subversion of equitable economic processes by exercising direct control over governments and institutions in order to enhance and maintain their position of power and wealth.

Adding this to the mix of an economic model based upon uncertainty we find that our current economic system is extremely unstable in the six states that it moves across: boom, crisis, inflation, stagflation, deflation, stagnation, expansion, or recovery. This movement of our economy across these states entails variability of time within each state with the stagflation state not occurring in all economic cycles. A complete 'flow cycle' would encompass one entire sequence from boom thru recovery.

With the preceding summary analysis in mind, it should be apparent that our economy is experiencing a momentary period of stagflation that will soon be followed by a prolonged deflationary period. Businesses are currently attempting to pass along some of the monopolistic price increases injected into the economy by the "oil trust" in an attempt to maintain their inflated profit margins or in some cases just to break even. When businesses realize that consumers are financially 'stretched to the limit' and are no longer able to supplement their paltry incomes with additional debt two options will remain: either go out of business or reduce profit margins on products. There will be many firms especially within the retail sector that will 'fold' simply because there will be no one who will purchase their merchandise at any deflated price.

The majority of businesses will eventually opt for bankruptcy, ultimately being forced into liquidation. These business closers will feed into a deflationary spiral through further and further employment reductions that drop more and more consumption out of the system. This will be a very painful process given all the perturbations infused into our current system by the business elites who've been attempting to enhance their exorbitant personal incomes extracted from their business concerns through labor arbitrage - outsourcing, and importation of cheap foreign sources of labor.

We are now on the cusp of a very dangerous drop.