Monday, January 26, 2009

Is Deflation Real 01/26/2009

Our government wants us to believe that there is no inflation. Let's define inflation. The common definition is 'too much money chasing too few goods'. This results in paying too much money for goods and services relative to their value. Let me inject a little food for thought. We all know as the year 2009 begins, home prices in the US are still falling. The government says that is 'deflationary'. But is it?

Let's say you are looking to buy a house in an area where all the houses are selling for $100,000. Would you pay $200,000 for one of these houses? If so, you are succumbing to inflationary pressures. Now, let's say you bought a house last year for $200,000. Let's say that now the houses in your area have fallen to the $100,000 valuation level. Yet, you are still paying for a mortgage that cost you $200,000. In other words, you are paying $200,000 for a $100,000 house. Isn't that inflation?

The same logic holds true if you have your salary reduced, or benefits reduced. You can work a second job to make up the difference. You can pay for your own health care insurance or contribute to your own retirement plan. The point is, your standard of living has decreased and that is the work of inflation. So, just because the price of housing is falling, we are not necessarily experiencing 'deflation'. The people holding mortgages are actually experiencing inflation. A salary reduction is not 'deflation'. It is inflation. The living expenses do not decline in proportion to the salary reduction. Therefore. it is misleading to call this deflation. This is how our government tries to sway our thinking.