Merry Christmas! Everything is on sale!
December 24, 2008 – 2:02 pm
Haggling is up at the nation’s retailers, according to AP (via Drudge).
If you’re looking for an extra bargain before the holidays, you may only have to ask. With holiday sales shaping up to be the lowest in years, possibly the worst since the industry began annual comparisons in 1969, retailers say they’re taking consumers’ demands for good deals seriously. Some are extending return policies, while others are matching competitors’ prices. Many are volunteering on-the-spot discounts and even letting customers haggle prices well down from what’s marked in a desperate bid to make the cash register ring.
This is to be expected. With credit tight and unemployment up, there is less money chasing goods and services in the economy. But store shelves are, for the moment, still stocked with previously purchased inventories. So supply is high relative to demand. When supply is greater than demand, prices fall, sometimes quickly.
This is deflation in action. And Bernanke is panicked about it.
When demand goes down and prices fall, businesses go bankrupt. When businesses go bankrupt, more jobs are lost and demand falls futher. Prices continue to fall, leading to still more bankruptcies and job losses. As Bloomberg notes in an article on today’s consumer spending figures (which actually weren’t too terrible):
The deteriorating job market means consumers will probably further rein in spending; economists including those at Morgan Stanley estimate more than 400,000 people will lose their jobs this month.
It’s a vicious circle that policy makers panic about since ever-higher unemployment is a social cancer to be avoided.
The solution proposed, however, isn’t a solution at all because it will only lead to much higher unemployment over the long-term. The Fed has lowered interest rates to zero and is now planning to “print” money in order to encourage more lending. If credit is more widely available, folks can borrow in order to spend, inflating demand.
But for how long? Have we learned nothing from the housing bubble, where excess investment and freakishly easy lending standards pumped prices to unsustainable levels? Driving people deeper into debt in order to “keep the economy going” is a recipe for short-term stimulus but also long-term disaster.
Debt has to be paid back eventually. Inflating demand artificially by easing credit standards just encourages more current consumption at the expense of future consumption. Folks borrowing to buy stuff today will be paying off debt tomorrow.
This is America’s future: working to pay off debt. The more debt we run up today, via ridiculously huge “stimulus” packages, government bailouts and unfunded retirement liabilities (Medicare/Social Security), the more consumption we’ll be forced to forego in the future.
The only real solution is to pay off debt today, which means consumption will fall and businesses will fail. In short, we need to let the business cycle happen. Of course this is terrible news for folks who lose their jobs or see their pay cut. But in the long-run it’s the only real solution. The more debt we incur to artificially inflate demand today, the more jobs will be lost in the future anyway.
Yes, jobs will be lost if we let businesses fail. But our consolation will be much cheaper prices on everything from houses to flat-screen TVs!
Posted in Economy, Fed, bankruptcy, credit crunch, deflation, government spending, taxpayer issues |
7 Responses to “Merry Christmas! Everything is on sale!”
Good piece.
I have to say, though, a couple factors prevent me from being too excited about low prices on consumer goods.
One is that the low prices only apply for a small amount of inventory which remains of desirable items, and then the shelves are cleared. It is questionable whether we will have these items again in adequate supply at reasonable prices any time soon– and I mean years.
Another is that cheap flat-screen TVs and designer clothes is poor consolation for a comprehensive economic collapse, with everybody effected by general blights like mass unemployment.
It has been said that “oil prices collapsing to many-year lows would be a bad sign, not good” — and sure enough, we seem to be immersed smack-dab in the worst-case scenario in that regard. The catastrophically low prices are a bad sign, not a good sign.
Of course, things do have to correct. But the transition back to production within US shores, and repair of US infrastructure, will be long and painful (as the fall has been 30+ years in the making). The whole culture will have to be changed.
Your comment “This is America’s future: working to pay off debt.” is very appropriate. But I think that is a tragic observation on a few counts: one is because it was known well in advance we were on an untenable path, but as each year went by, we basically doubled-down. Second is that much of the debt is really illegitimate, foisted on us by negligent and fraud-spinning government officials, high finance “rainmakers”, and corporate chieftans. But the burden will be borne most broadly, that is, by the elements of society least able to truly carry it.
Finally, carrying this debt burden will take away from affirmative development that is needed to make the debt burden more bearable — a horrible catch-22, in which many countries have spent decades mired (some have never emerged).
By Aaron Krowne on Dec 24, 2008
very true. lower prices on flat screen TVs and designer clothing isn’t much consolation. Lower prices on necessities like houses, though, are a nice positive.
No doubt you are correct about the huge pain we’ll all feel as we try to pay down unpayable debts.
By RolfeWinkler on Dec 24, 2008
If I may bloviate some more…
You say: “This is deflation in action. And Bernanke is panicked about it.”
I think this adopts much of the “mainstream” deflation read, and I don’t buy into it.
Yes, prices in many areas are going down a lot, especially consumer discretionary and big-ticket spending (which requires financing).
But in other areas they aren’t: health insurance, tuition, legal fees, etc. And I’m not even sure food prices are truly down… when I checked on thanksgiving, the cost of a thanksgiving dinner was up 5.5% year-over-year. The monetary base is actually up sharply, due to the Fed’s monetization programs.
The post-July rally of the dollar has fizzled out, back-tracking by half — much faster than its already rapid and unprecedented ascent in the first place.
So if one defines “deflation” concretely as an increasing scarcity of money coupled with a rising value (measured in general buying power), this does not appear to be what is happening.
I think the confusion stems from what actually *is* vaporizing: credit. The disconnection is that in good times, credit behaves like money, but in panics, credit ceases to be treated like money.
That brings me to a related point. Back before the Federal Reserve era, depressions used to be called just that — depressions — and the falling asset prices and unemployment were called “panics” or the consequences thereof. The term “deflation” was not popularly used (if at all), despite the fact that some key prices were falling!
Part of the reason this connection was not made was because *the normal state of affairs was for prices to fall*, as the US had a hard money standard. In other words, the *normal* state of affairs was deflation!
Another reason was, as in the Great Depression, major market and social strife (panics, war, etc), were actually coupled with overall INFLATION, often after a brief period of decline in prices (in the Great Depression, the first episode of inflation was driven by FDR’s devaluation of the dollar).
So, in sum, I don’t buy the “we are in deflation, and deflation is the threat” party line. We’re in a credit bubble collapse, which has engendered a panic. Some prices are falling, but not all, and the more severe threat is that all prices will soon start to rise (sharply), as scarcity of goods begins to dominate, combined with abundant liquidity flooding by the Fed and Federal Government (think refund checks).
Also, the dollar is doomed to fall on the foreign exchange, an added “inflationary” aspect.
Panic != deflation. Deflation can be good or bad. Panic may or may not be stoked or engineered by the government. But the government’s attempts to “fix” it are usually harmful in the long run (and maybe short run too).
By Aaron Krowne on Dec 24, 2008
Under normal circumstances, small business owners are generally optimistic about our future. Today, the situation is different. As an analogy, we take an annual physical exam, even though we feel fine. However, the Blood Test usually identifies whether we are ill or healthy. Recently, the National Association for the Self-Employed (NASE) ran a survey which I created to diagnose the small business involvement in ALT-A and Option ARMs mortgages. The results were astounding.
You will note that these are the most “TOXIC” mortgages that will be RESETING in 2009 through 2012. The main problem is that 80-90% elected to make the “minimum” payments on these mortgages, thereby allowing the principle to grow and bring them into negative amortization whereby the principle was more than the original mortgage. The problem with RESET or RECAST is that now, these borowers must pay off the principle in the remaining term of the mortgage. No matter what the interest rate is modified to, the monthly payment will SKYROCKET to unsustainable amounts.
It is a tragedy when an individual borrower defaults on the mortgage and loses his/her home. The tragedy is magnified when the borrower is a small business owner, employing from 1 to 10 employees. The loss of jobs related to mortgage defaults and the resulting business failures will further weaken our economy and prolong the recession.
Job retention is as important as job creation. The small business owners are at great risk for their survival, as they must contend with personal and business debt, the recession, and the continuing forces of small business failure which have been exacerbated by the credit crunch and financial crisis. The economic downturn will dramatically increase the rate of small business failure and job losses.
I am a Professor of Accounting and Taxation at Kean University School of Business in Union, NJ.
On 4/16/08, I testified before Senator John F. Kerry’s US Senate Committee on Small Business and Entrepreneurship. I have researched the Foreclosure Crisis, and believe that you may find the following interesting as it relates to the PAY OPTION ARMs piece.
I authored a survey of small business owners which was run by the Association for the Self-Employed (NASE) which determined the involvement of the small business community in these TOXIC Mortgages that are about to RESET in the 2nd Wave of Foreclosures due in 2009.. NASE issued a Press Release on 11/21/08. The survey appears on their website at http://www.nase.org
Many fail to realize that there are millions of self-employed micro-businesses, who employ from 1-10 employees, that are holding these mortgages that are going to reset in 2009 through 2012. These borrowers are Prime and Near-Prime borrowers who hold ALT-A, Option ARMs, Interest-Only mortgages. There are $1 Trillion ALT-As, and $500-600 Billion Option ARMs.
So, here we have a major problem… These millions of small business owners will lose their homes, their business may fail, and their employees will go job-less. Obviously, the recession will exacerbate these problems. Although President-Elect Obama is stressing the need to create 3 million new jobs, we must understand that “JOB RETENTION IS AS IMPORTANT AS JOB CREATION”.
According to this survey, it is estimated that 3,709,800 small business owners hold Alt-A and other toxic mortgages, and 1,279,800 are already delinquent as they have missed one to three or more monthly mortgage payments at mid-November, before the expected Resets that are scheduled to begin in 4th Quarter 2008 through 2012.
Conclusion
Small business is the job creation engine of our economy. Proactive efforts must be taken to provide small business owners with immediate and specific financial guidance, combined with other measures, to avoid default on mortgages and other debts in this critical and challenging financial crisis.
Please see the NASE Press Release and my Commentary on their website http://www.nase.org. I hope that you would deem this important to address.
Thank you,
Samuel D. Bornstein
Professor of Accounting & Taxation
Kean University, School of Business, Union, NJ bornsteinsong@aol.com
732-493-4799
By Prof. Samuel D. Bornstein on Dec 24, 2008
Merry Christmas to All,
Surely, 2009 will look much different.
I think our biggest challenge is well beyond that of a financial collapse… that of corrupt leadership, no rule of law and ignorant or lazy masses.
Our financial collapse is inevitable and unless we have genuine leaders we are doomed to martial law and or anarchy.
We can survive as a United, bankrupt nation, but not when our leaders continue to bury us in debt, destroy our; currency, Constitution and rule of law.
Currently our government is just shifting the losses from the crooks who created this crisis to the masses.
Paulson’s informal request may has started the clock ticking.
“To access the rest of TARP, Paulson has to report to Congress on how the funds would be used. Lawmakers then have 15 days to pass legislation blocking the money. The president could then veto the congressional vote, forcing lawmakers to come up with a bigger majority to prevent the disbursement. ”
http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=adq._JZdgZKw
This is the perfect time for the crooks to continue their crimes; during the Holidays and right before Bush leaves office.
We must get America to wake up and demand the $350 does not get released until after Obama enters office. Another 20 days or so will make no difference and we will have much better accountability. Am I HOPEful about Obama, NO!, but he will definitely have to be more careful.
Perhaps Obama and Co. will just let the money go so they can get more money and blame the ineffectiveness of the first $770 B on Bush.
This is the most important battle for our Nation right now…Today!
With people home for vacations Mish, Denninger, Winkler, Krowne, Janzen, etc. should send out the word to demand their reps stop Paulson. This is B.S.
Mish already had many posts and phone numbers. We should also get it out to the media for additional coverage.
We don’t even know what happened to the first $350; here is the docket and filings for the case from Bloomberg:
http://www.michaelblomquist.com/casespending/BloombergvFed/
We need rule of law and to make sure our representatives uphold their oath of office.
Demand no release of the $350 billion and investigations for the prior $350 billion.
Merry Christmas,
MB
By Michael Blomquist on Dec 24, 2008
Dismaying to me is that there is such desperation to pump money into the economy so it can get back on track to where it was - yet consumption where it was is unsustainable.
As was said in the a previous comment, public debt is being substituted for private debt. Individuals putting themselves in danger by individual acts are being supplanted by government putting us all in danger collectively, both acting blindly with regard to the future beyond, say, ten years. It appears that even unlimited public debt holds no danger compared to the threat of a decrease in spending.
So we are not free to restrain spending. If I restrain myself, government will act in my name to counteract me, telling me it is for my own good.
People have obviously shown themselves eager in material pursuit. For years I marveled at the huge number of restaurants, each packed with overweight people eating larger and larger portions (or leaving more and more on their plates to be tossed as waste). The increase in size of homes has been widely noted. Call it a feeding frenzy. It was waste as surely as is the fleet of unsellable vehicles at seaports but different in that waste combined with consumption is quite acceptable and far less obvious.
The warning from what we have just been through is being obscured by the recession. The warning is that we can’t continue with this system, no matter how much we like it (and I do as much as anyone). Perhaps Obama will have a super secret department studying how to transition to a post capitalist world? Can you imagine the uproar over such an effort from all quarters? The alternative is eventual chaos and decline as planetary limits (warming, ocean acidification, dead zones, soil depletion, overfishing, etc. etc.) impose on us with increasing severity and countries refuse to relent in pushing “development”
The dinosaurs were complete idiots compared to us, yet they held sway several hundred million years. We are going to bounce ourselves out of the driver’s seat after far less than 1% of that time unless we individually and collectively find some way to practice restraint that people will engage in willingly. Warfare on a large or small scale will do this for us if we are unwilling. The way the housing/credit bubble expanded in a universal joy ride does not offer encouragement and people who have known luxury followed by relative deprivation are only primed to want even more what they have lost; to feel they are entitled to it and have been deprived of it unjustly.
Can the study of economics even address the issue when it is dedicated to maximizing wealth? Someone want to start a new field of study? I admit readily that I haven’t a clue about what alternatives there might be, but I’m eager to listen to anyone with ideas to propose and/or links to give us - suggested website name: ElephantInTheRoom
By CB on Dec 24, 2008
Exactly!
On top of deferring and prolonging the agony and pain, the quant easing, the TARP, and the new stimulus package, would in combination increase the economy’s volatility. Expect huge swings in exchange rates and exaggerated business cycles. Let’s hope that the momentum caused could be capped and would taper out soon (somehow).
By Lim on Dec 24, 2008