Tuesday, June 8, 2010

Double-dip Depression?

Lower prices could mean deflation and double-dip

Lumber prices are sinking. And while that might make a trip to Home Depot cheaper, it's also a sign that the global economic recovery and the U.S. housing rebound are in danger of stalling.

Only a few months ago, inflation was the main worry of many economists. But falling prices for the raw materials of many industries, including lumber, have set off deflation warning bells for some economists, who worry that they could signal another global economic downturn.

Prices for framing lumber have tumbled 21% from their peak only five weeks ago, according to figures from the National Association of Home Builders. Prices are also falling for a wide variety of other industrial materials in recent weeks.

While consumers love falling prices, deflation can cause far more damage to growth than inflation can. Lower prices cause businesses to cut back production, which can lead to layoffs, which can then cause further declines in demand due to falling incomes and consumer spending, creating a downward spiral.

If prices continue to fall, it could cause some producers to cut back production or go out of business because they can no longer cover their manufacturing costs, according to Eric Schooler, CEO of The Collins Companies, a Portland, Ore.,-based lumber producer.
Please don't tell me "the worst economic crisis since the Great Depression" can't get worse.

Had enough HOPE and CHANGE yet?


Bike Bubba said...

Keep in mind the last real deflation we had was in the 1930s, and it was preceded by a decade of deflation in the 1920s.

So is deflation linked to the roaring 1920s, or the Great Depression, or both, or neither?

K-Rod said...

Good question. Probably both.

The question is what do do to prevent it.

I don't think the current direction of stifling investment and innovation while expanding government and record debt is the solution.

Bike Bubba said...

My take is that deflation is just a symptom, not a cause--and when one targets an inflation or deflation rate instead of dealing with the underlying causes, one will simply tend to benefit borrowers over savers. (government loves inflation, as it's effectively a tax on the money supply)

In doing so, you get tons of people borrowing and defaulting on loans, recession following.

(as Mises might have said, it's not a business cycle, but a government cycle)

K-Rod said...

So, what symptoms might we see from lowering cap gains tax, and giving tax breaks for companies innovating and hiring?

Bike Bubba said...

Might be good. Even better, IMO, would be to so some major simplification of the tax code. When you combine $300 billion in compliance costs and the same amount in taxes evaded, we are talking about a serious stimulus to the economy that could be had without reducing tax revenues by one penny.

K-Rod said...

Excellent point, as usual BikeBubba!