New Year? You could have fooled us. It seems just like the old one.
We are tempted to ask for our money back, except we’ve got it for free so we’ll give it a try.
Listening to all the talking heads on TV during December had lulled us into thinking that the 1st January would herald the arrival of a new dawn. The “January Effect” – whatever that is. It’s probably similar to the “June Effect” – again, whatever that is.
Of course, you and I weren’t fooled. But it is tough to avoid a lot of the nonsense that is still doing the rounds.
As an example, you need look no further than the front page of today’s Australian Financial Review (AFR). A quote from ‘Chanticleer’ tells us:
“Many of the headwinds that buffeted the global economy will continue in early 2009, despite the massive stimulus provided by governments and central banks.”
Actually, we agree with most of that statement. With one important exception. You see in the middle where is says ‘despite’, well, you should replace that with ‘because of.’
Left to run its own course, free of government intervention, what is still being described as ‘headwinds’ would instead be a tailwind. We’re not saying the fallout would be any less painful in the short-term, but it would avoid a whole bunch of worse consequences in the future.
So, what are some of those headwinds in 2009? From what we can see they are all the result of knee-jerk, haphazard policy decisions. They are, in no particular order:
- Inflation
- Interest Rates
- Commodity Prices
- Employment
- The Economy
All of them – with the possible exception of commodity prices – have a direct link to the so-called stimulus packages. Although at the very least there is an indirect link.
We’ll go through each of them over the next few days, barring any other exciting events that cause off to swerve course.
Inflation – Let’s get one thing straight, despite what the mainstream press is parroting from policy makers, deflation is not even on the radar for 2009. But, just suppose deflation did occur, is it as bad as you are being told?
Deflation means a persistent fall in prices over time. The argument for why this is bad for the economy is that consumers defer purchases in the belief it will be cheaper in the future. This could mean that businesses sell fewer products and may therefore need to lay-off workers.
It also potentially means that government income is reduced through less tax revenue, while its costs (unemployment benefits) rise.
We can break that down further: increased savings, less spending, less government spending, less new debt.
For savers it is great news. The value of your dollar in the future will be worth more to you than it is today. It sure makes a change from having to earn more than 4% on your money just to stand still. That’s what inflation does for savers!
How is that bad? If we hadn’t had the boom, then yes it would be bad. But as an antidote to the excesses of the boom it’s difficult to argue against it.
Of course, there is a downside to deflation for one group of people. Those with existing debts. If prices fall and wages fall then debt levels are comparatively higher, making servicing the debt more expensive.
But let’s be serious about it. Even without government intervention, sustained deflation would have been unlikely. Sure prices could fall for a period, but the way some of the Keynesian inspired economists are talking you would think there is a danger of every last consumer suddenly battening down the hatches and not spending a bean.
The reality is that as prices fall, some consumers will jump in and buy at those prices, believing they are getting a good price. Prices could fall further, and again other consumers would start buying.
Just as we see buying support coming into the stock market as prices fall, so it would happen with falling prices for products and services.
That would result in companies rehiring as demand started to increase. Companies would feel less pressure to drop prices, and over time consumers would start to buy in as they believe prices would be unlikely to fall further.
Again, just as we see happen on the stock markets.
Unfortunately, the panic merchants in government, and pressure groups are preventing this from happening. Instead we are seeing bad lending practices and bad borrowing habits rewarded. And more importantly, an increase in government spending on questionable projects such as bridges and roads will result in further inflationary pressures just when the consumer needs it least.
Comments on this entry are closed.