One economic theory states that we can never have deflation in a long term economy. For prices to deflate would be contrary to the built-in safeguards put forth by the government agencies. The main cause of a deflation would have to be a massive withdrawal of money from the banking system. As long as the money is insured, that is unlikely to happen. I tend to agree with that theory. It is unlikely that prices will go down long term as long as people have confidence in having their money in the banks.
One of the safeguards put into effect in the 30s depended on the negotiation of wages. No one group of wages, but all American Manufacturing was based on Union wages. Inflation and wage increases went hand in hand all through the 50s and to some extent through the 60s. Nonunion people normally could do a “me too” on the backs of Union worker's negotiations. If a Union member negotiated a contract for $10 an hour plus benefits, companies tended to pay the nonunion worker just a little less. But to remain competitive in attracting people, they had to match the wages fairly close.
In that kind of atmosphere it was natural for more and more money to be printed as wages increased at a rate of at least 4.5 percent per year. You can go to almost any book on Finance and Appraisal in the Real Estate Industry for a practical guide of inflation and price increases.
In the appraisal industry there is a somewhat more practical economic theory in place. It is based on actual market conditions. It is based on what an individual home owner can expect to get for his home on the open market. This is based on actual sales in the area and also has the type of loan as part of the appraisal.
Normally, given identical model homes in a housing plat, the Real Estate Agent can come within $500 of what a house should be expected to sell for. Until now . . . with all the foreclosures it isn't easy to know what a house will sell for tomorrow.
The price of homes has deflated. A house that was worth 200,000 five years ago is probably worth 80% of that today. Even the tax auditor has been forced to lower the tax base because the price of marketable homes has gone down. The price of real estate has deflated.
Starting with the busting of the Air Controllers Union by Reagan in the 80s, the Unions are no longer the leaders in wage negotiations. The last figures I had were 10 years out of date. 11% of workers were unionized outside of civil service. The numbers have declined since. The national average of wage increases is down. When I left, the company I worked for was giving nonunion workers a maximum of 2.5% a year. That was 5 years ago. Most people are thankful to still have a job. Some of them have taken wage decreases to keep their jobs.
That is deflation of another kind. We are talking about people doing more work for less money.
There is an issue of deflation in wages. Translated to practical terms, people have less money to spend than they did five years ago. This means that high prices at the store means less goods sold. Many companies are in controlled bankruptcy right now. They may or may not come out of it in a few years time. They are under dreadful reorganization plans that lay people off, do away with pension benefits, and generally push people into being broke all the time.
I know people that have been forced out of their jobs in higher paying positions. They are forced to take positions sometimes 3-5 dollars less an hour just to keep going.
So if companies do raise the price on everything, who is going to buy the goods? The loss of Unions in the workplace is causing this deflation of wages. Just like someone trying to defend themselves in a court of law has a fool for a client, someone trying to personally negotiate wages for themselves also has a fool for a client. Yet even a professional negotiator would have a difficult time working with the companies in this market.
In theory, our government controls should keep things from deflating. Stable banking should do that. My question has to be that if people's wages go down, how can they afford higher prices? The theory is correct. It simply does not take into account that people no longer have the money to afford the goods if the prices increase. A good indicator of this lack of discretionary income is the fact that few people have savings accounts any more.
So yes, I think deflation of the economy in the marketplace is inevitable. I think hyper inflation will come first. Then the businesses that do this will go under. Businesses that take their place will have to be a lot more cautious about raising prices beyond what people can afford.
The beauty of all of this is, nature will take over. Things have to balance out and the marketplace is the great equalizer.
The Unions were both a gift and a curse. The curse was the constant negotiation of higher wages and currency that was worth less and less. The gift was it enabled taxes to increase to pay the bills.
Our currency went down the tubes in the 70s. Why? Because we had 400 billion in war debts to pay back. Taking us off the gold standard enabled those people to pay the debt back at 10 cents on the dollar in actual currency worth.
Well, if truth were known, the war debts are going to be a lot higher this time around. So without the use of Unions to stabilize increases in wages to meet our standard of living, how are we going to pay back the debt in cheaper dollars?
The entire idea of the 30s style unions was to balance things out. Someone in the current governments we have had in recent years has forgotten why we did that. Just like they have forgotten so many other principles that worked.
(Authored By Dave Webb)