Sunday, September 25, 2011

Good News Everyone


After an incredibly volatile day on world markets, the head of the International Monetary Fund, Christine Lagarde, warned of a looming "collapse in global demand" which threatens to push economies around the world into a new recession.

And we all know what happens when recessions hit.. right? That's right kids.. deflation! Prices come down because nobody can afford to buy shit.. so that super fabulous vacation to that far off exotic location? Cheap!

Did your Chiquita just contract a fatal illness and need to be replaced? Offer table scraps to one of the 8,000 applicants and bam.. yer crib is sparkly new!


The only real problem with this paradigm is that luxury goods tend to hold steady prices. Rich people are still rich and the demand for.. say.. a Porsche 911 Turbo is going to be steady, so there won't be a dip in prices.

The other component is a contraction in the manufacturing sector. Lower demand will simply lead to less production.. higher unemployment, but supply/demand curves won't go so out of whack where the deflation will be massive. Business simply won't continue to produce an excess of product to sell at a loss. They'll try their best to keep prices propped up for as long as possible.

The really nasty thing about deflation is that it increases the relative burden of debt. A drop in the value of the dollar has a proportional affect on relative debt. That's why a modest inflation rate of around 5% would be a good thing for people in debt. Each year, 5% of their debt is simply erased due to the increase in inflation. It's basic math.

However, for those of us that carry only debt on mortgages, it's not a big deal either way, as long as we can still write off the interest we pay on the mortgages for the homes we own, we'll end up ahead.

I'm sure most American households own multiple homes, so that'll be a nice way to continue paying lower taxes. Right?

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