The shadow of deflation

The shadow of deflation

Washington Post: Sign of the times: A local auto dealer is not only offering deep discounts on its swollen inventory of sport-utility vehicles and luxury cars, it’s giving away 100 shares in General Motors to anyone who buys a vehicle.

This is the sort of thing that happens when the markets for assets of all kinds — from Cadillacs to stock in the company that builds them — begin to spiral downward. Last week’s devastation on Wall Street is part of the same phenomenon, as are the precipitous drops in the price of oil and other commodities. Economists call it “asset price deflation,” and it is driven by the worldwide shrinkage of credit and the corresponding scramble to turn anything that can still be sold into cash. Lower prices may sound appealing, but as consumers get into the habit of waiting for them to go down even further, they buy less, which causes producers to cut back on production. Jobs vanish, banks fail and the economy stagnates. Historically, deflation has caused misery whenever and wherever it strikes, whether in the United States during the Great Depression or in Japan during the 1990s.

Years of entrenched deflation are a disaster scenario, but there is still time to avoid it. There is a near-consensus among economic experts that the U.S. government must enact a large package designed to free up as much consumer and business spending as possible. A program of infrastructure improvements calculated to improve the long-run productivity of the economy should form a part. Judging by comments in his radio address last weekend, this is the sort of stimulus plan President-elect Barack Obama intends to present as soon as he takes office.