Deflation

Reading various economic related blogs, the great fear with this recession we're currently finding ourselves in is deflation, which is, of course, what you call it when prices continue to fall over time, making the dollar less valuable in relation to goods and services. Why is this a problem? It would seem to be a good thing if you have a wad of cash in your wallet, you can buy more and more cool stuff.

The problem is that in deflationary times, people stop buying. Why buy something now when you can get it cheaper tomorrow or next week. This phenomenon is what's happening currently with house prices. I know personally people who continue to rent even though they are in the perfect demographic for a house buyer because they want to time it just right to get in when house prices hit the bottom. This house price deflation, though, is hurting people who own those same houses, as they continue to loose equity, and if nobody is buying, they suddenly find them in a situation where they can't sell, especially if they need to (for example, what if you need to move for a job offer, or because you no longer need or can afford your house because of a job loss or retirement). This housing deflation condition is hurting our economy significantly, putting added pressure on the housing bubble, squeezing people who took out bad loans when times were good, and causing more and more foreclosures, further putting downward pressure on housing prices.

And, deflation is hitting other sectors of the economy as well, as the recession deepens, people lose their jobs, they stop buying out of necessity, and as the demand for goods and services shrink, so do prices. As businesses see shrinking demand, they try to shrink supply to match which puts more people out of work, further shrinking demand. Its a downward spiral toward stagnation and increased unemployment.

These conditions have the fruits of many years of really irresponsible economic behavior. Too many people trying to make money in the finance sector, too few people trying to make money making goods and services people could actually use or want. As people have a savings large enough to give them some measure of confidence, they suddenly have the confidence to continue their shopping behaviors through good and bad times.

Ironically, though, we should be a little use to deflation and we should, to some extent, know how to be responsible shoppers in bad economic times. The industry that thrives on deflation is the computer industry. The whole nature of technology is that because of the massive amounts of research and development, we get used to buying something because it will enhance our lives now even though we know that new, better, and cheaper technology will be available in the near future.

My wife bought me a really cool iPod for my birthday a few years back, and the cost of the iPod has been more than made up by all of the knowledge I've gained listening to podcasts. Ironically as well, the iPod has made me love going to the gym. I associate working out with podcasts, my one time I can listen to a podcast guilt free, and it helps me to prioritize exercise into my schedule which, of course, is another benefit.

Well, this Christmas, I returned the favor and bought my wife an iPod touch, and I must say, it is an incredibly awesome device, and so much more than a mp3 player. In fact, its music playing capability is no longer its best feature. Just last night I downloaded an application from the apple store that will allow my wife and I to track our daughter's diabetes very simply, then e-mail the reports from those logs both to ourselves and to our doctor. Very cool, and the price I paid for the touch was cheaper than the price my wife paid for my iPod. And all my sad iPod does is play music, no internet access, no video...

But should my wife waited? Absolutely not. I would have missed out on a really cool device. Will there be an even better device next year then the one I bought my wife? Most definitely. But we jumped in to bless our life now. And really, how long will our lives last anyway? How long should we wait on the sidelines until we take a risk, use some of our financial resources to buy things that will empower us to do more, to be more, to enjoy our lives more.

Of course, houses are much different than computers. They are much more expensive, the consequence of a bad purchase our much more severe. And, in my humble opinion, we have not been smart shoppers in the housing front, buying houses to show off more so than to fulfill our own personal need. We over-leveraged ourselves nuerotically, and now we are collective neurosis is bringing our economy to the brink.

We need to think more seriously about what exactly we want out of our house. A house is not an investment. We should not be buying houses simply to flip. We should not want to live in neighborhoods consisting of a sea of identical looking McMansions, impressive at first glance but lacking soul or heart.

Here's one example of a how we can get out of our housing bubble. Start building houses that people really want to live in. Innovative houses that excite demand.