Sorry About that Inventory, Prices Must Come Down

As George Reisman notes in a recent column, falling prices are not the cause of deflation, they are the solution to it.

Reisman defines deflation as the lowering of DEMAND for goods - this lower demand drives prices lower so that equilibrium is reached.

The losers in a deflationary environment are asset holders. People with fixed assets (like houses) and even liquid assets (like stock market investments which are held long term), as well as companies with large finished goods inventory; all have seen a large decline in the value of these assets over the course of 2008.

Reisman rightly implies that holding off on clearing the market is not the solution. This is what happened during the 30's in America, and Japan in the 90's. In the former case money tightened thus driving prices higher, not lower as they needed to go to clear the market. In Japan, the money supply was opened wide, but institutional restrictions held prices artificially high.

In our current situation, the Fed has opened the money supply widely putting short term interest rates close to zero. By pumping lots of liquidity into the market they hope to stimulate demand. As well, prices are falling in the housing market, and no restraints on falling prices have yet arrived (e.g. beware price controls, remember them from the Nixon era?).

The market must be allowed to clear to get the economy moving again, however the looseness the Fed is now encouraging and enforcing through it's various powers, will most likely result in rampant inflation sometime around late 2009 - 2010 so beware.

Zingerman's in the News

The May 3rd NY Times business section has an article on Zingerman's, that great deli turned all things food that serves Ann Arbor locally, and everyone on the web. I have great feeling for this place since I was in Ann Arbor for Bschool from 1983-1985.

In fact, I saw a presentation several years ago sponsored by the UM alumni club here in Chicago. Learned many of the things that the article said, the leaders and co-founders of Zingerman's, Paul Saginaw and Ari Weinzweig, are unique in their outlook, as Weinzweig is quoted, "Our goal in 2020 is to leave our world better than it was when we came here." Nicely said, read this at www.nytimes.com if you can.

Also that day, a long time known issue with stocks was cited by Hal Varian in the Economic Scene. He describes a paper by UM accounting professor Dichev that says that stock market investors who buy and hold are way ahead of buyers who use average dollar investing, that is moving in and out. For the NYSE a buyer in 1926 who held their investment until 2002 would have earned an average annual return of 10%. By contrast, a like buyer who moved in and out based on market sentiment would have earned 8.6% per annum. Of course, Dichev discovered this in 2004, http://www.umich.edu/news/index.html?Releases/2004/Dec04/r121504a, something you can see here for yourself, so what's the big deal in rehashing this now?