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DE-flation: Nationwide Gas Price Drops Below US$2.00

Say WHAT?  “DEflation”??  But, Jay, you’ve always been talking about “INflation”… what happened, you ask?  Well, the following have happened:

  • Credit freeze and resultant lack of liquidity is significantly hindering world commerce.
  • All Central Banks around the world are cutting interest rates… interest rates are cut to fight deflation, not inflation.
  • U.S. is in a recession… consumers are not buying cars so the auto industry is collapsing.  This holiday buying season is expected to be one of the worst on record.
  • Job losses: Unemployment is at a 25 year high in total numbers… 10.8 million or 6.5% of the U.S. population is out of work and the fraction is expected to increase to over 8% next year.
  • Oil at $50 per barrel from $140… U.S. gasoline is now below $2.00/gal, a clear example of deflation in prices.
  • Consumer sentiment at all time low.  Home foreclosures are at an all-time high pushing people out of their homes which further erodes consumer sentiment.
  • Without consumers spending – low demand – prices cannot rise.

The Central Banks and governments of the world have to do whatever it takes to prevent deflation.  Why?  Because it becomes a “death spiral”.  Just think about it.  Would you go out and buy that flat screen TV if you know that a few weeks later the price would be lower?  Of course not!  Thus, consumers hold off spending and the U.S. economy, 70% dependent on consumers spending, grinds to a screeching halt.  This is what happened in the Great Depression of the 1930′s.  Again, every possible thing will be done to prevent deflation from taking a foothold.

President Elect Barrack Obama today announced that he has chosen Paul Volcker to lead his administration’s Economic Recovery Advisory Board (ERAB). The aim of the ERAB is to bring in leaders from business, academia and elsewhere to provide an independent perspective on how to handle the current economic crisis.  This is a good move on Obama’s part.  Volcker presided successfully over the Federal Reserve as Chairman in a very rough financial period of the late 1970′s and early 80′s.

But what about INflation, Jay?  Ah, my Padowans, inflation is only being put on the back burner for the short term while the deflationary forces dominate the world.  Once these deflation bugs are worked out and the financial crisis mends, inflation shall return due to the incredible amount of “printing” of money.  Next year’s U.S. budget deficit is expected to hit $1Trillion and added to the bailouts already antipated, the current $14Trillion in total M3 money supply will jump $3Trillion or 28% to $17Trillion further debasing and devaluing the U.S. dollar.  This is inflation’s “hidden tax” we Americans pay.


The Dream Team hosted one of its periodic “Global Outlook” calls last night with Jay covering all this material along with the world economy, markets, Fed and fiscal policy.  The call was recorded and can be found on our Dream Team training site.  To receive notification of these calls and access to our Dream Team training site please opt-in on our home page:  

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  1. 2 Comment(s)

  2. By Kirk | Reply


    How do you (or perhaps, do you) differentiate between decreasing prices resulting from lessening costs and decreasing prices resulting from banking/money problems?

    For instance, people had no problem buying a new computer or TV when the prices were declining in an expanding economy. There we assume the prices were declining because of technological advance, better manufacturing processes, and more competition (among other similar things). The other situation is when prices decline because people are experiencing economic difficulty, such as job losses, credit inaccessibility, and poor spending decisions.

  3. By admin | Reply

    Hey Kirk,

    Great comments and observations. As you point out, we have both the decline in resource and commodity prices AND the reduction in spending by the consumer in the U.S. Both are deflationary. Thanks, Kirk.


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