The U.S. Economy, and a Low Price Guarantee

Consumers may be about to learn that the wheezing, winded U.S. economy has something in common with Wal-Mart’s famous guarantee, “Always Low Prices.”

Remember all the recent worry over inflation? Here’s a reminder headline from the Marketwatch news service from March 2009: “Gold rallies 8% as Fed move fuels inflation fears.”

Behind the worry: government printing presses are running at full tilt, creating fistfuls of cash out of thin air to finance soaring budget deficits. Thus, inflation – nay, hyperinflation! – is just around the corner.

In short, inflation refers to a general rise in how much things cost. Inflation means a dollar today buys you less than it did yesterday. Jacking up the nation’s money supply is one contributing factor the textbooks point to in explaining how the purchasing power of a dollar gets eroded – more dollars means they’re not as valuable, so to speak.

The economy, however, is not headed there yet, in the view of some observers. Sean Dieterle, a portfolio specialist for the closely watched Pimco investment company, was in Memphis last week talking about this issue, and he said the inflation rate is already below the government’s stated preferred target.

The government favors a low, steady rate of inflation. When it drops too low, the economy can fall into the opposite, but no less worrisome, territory of deflation.

Unfortunately, there are signs that may be where we’re headed.

Heavyweight investors – like Dieterle’s employer, according to Monday’s Wall Street Journal – have begun positioning themselves to be ready for a bout of deflation and the possibility of a vicious, downward economic spiral that, once having arrived, is hard to shake off.

“Deflation isn’t just a topic of intellectual curiosity, it’s happening,” bond fund heavyweight Bill Gross, Pimco’s chief executive, told the WSJ.

Dieterle said the same thing in Memphis last week at The Racquet Club, as I reported in Monday’s Daily News.

It might sound like an abstract concept for the ordinary consumer, but it’s one that will affect the daily lives of Americans in profound ways if it materializes.

While inflation is a general rise in prices, deflation is just the opposite. When prices fall, companies can have a harder time staying profitable. Lower wages and higher unemployment are some of the possible results.

From there, the spiral continues. Unemployed people don’t buy as much as people with jobs, because they don’t have the money to. That can lead to lower consumer demand – and so on.

Wal-Mart’s low price guarantee, it seems, may apply to the U.S. economy sooner than later.

Dansette

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