Deflation or depression?

For generations, in addition to the risks of recession and unemployment, the common economic pain inflicted upon the general public throughout the free world was inflation. Rising prices routinely outpaced rising wages. It cost more to buy less. As the post-World-War-II era song goes:

Now listen Mr. President,
all you Congressmen too,
you got me all frustrated
and I don’t know what to do.
I’m trying to make a dollar,
can’t even save a cent,
it takes all of my money just to
eat and pay my rent. 
That’s why I got the blues,
got those inflation blues.
Now you take that paper dollar,
it’s only that in name,
the way that paper buck has shrunk,
it’s a low down dirty shame.
I got the blues, got those inflation blues.

In the 1970s, with the Soviet Union trapped behind the Iron Curtain and China trapped behind the Bamboo Curtain, America, the undisputed beacon of free enterprise, was trapped in an inflation vortex. Declaring inflation “public enemy number one,” President Gerald Ford called upon Americans to “Whip Inflation Now” by saving more, spending less and pledging their allegiance by proudly wearing WIN (Whip Inflation Now) buttons.

What deflation really means

Suddenly, with the blink of a cosmic second, the great fear facing governments and businesses is now deflation.

What was a condition unique to Japan following its asset price bubble collapse in 1989 — two “Lost Decades” of declining GDP in nominal terms, real wages falling and stagnant price levels — is spreading globally. For example, the constant drumbeat from the president of the European Central Bank, Mario Draghi, is whip deflation now: “Let me be clear: We are accountable to the European people for delivering price stability, which today means lifting inflation from its excessively low level. And we will do exactly that,” he promised this past October.

What is being called low inflation are lower prices that are battering commodities: Corn, copper, silver, oil…yes, oil, the canary in the price-war mine shaft. In just six months, oil prices plummeted over 40 percent. It is a trend we identified in the making back in June. As with many other core commodities, falling prices are not the sole result of increased supply but an indicator of a slowing global economy.

It is not only evident on equity market trading floors, it was glaringly apparent in the nation’s shopping malls. The highly touted Black Friday holiday shopping forecast for sales to rise 4.1 percent turned into an 11 percent bust. Despite deep discounts, fewer shoppers turned out and those who did spent on average 6.4 percent less than a year ago.