If, inflation is a “silent tax on all consumers” then isn’t a little deflation “a silent tax cut” for us all? If the economy is indeed slowing, then rather that forcing the Fed to lower rates and further emasculate the dollar, won’t a little deflation do the same things for him without a rate cut?
Let’s look at it. All summer into fall we were hearing about inflation and it’s evils. We were hearing that even the governments numbers were wrong and that inflation was actually higher than report due to food and energy.
Well, high prices did the trick. They destroyed demand. Isn’t there an old saying that “nothing cures high prices lie high prices”, meaning people cut back on items when prices rise too high? They rose, we cut back.
Now things seem to be slowing a bit too fast and correspondingly, prices are falling (deflation). Oil (USO) has fallen from $146 to under $94 and food commodities have plummeted with it. But, if high prices are cured by their very being, then ought not low prices be cured by the increased demand they then illicit?
Now of course there other factors involved and I am purposely keeping this basic. Why? We have had unprecedented Fed, Treasury and SEC actions and now Congress is due to get in on the game. We need time to let these event filter through the system before we begin to worry about falling prices.
The best thing the Fed could do now (once Congress acts) is to sit back for a while and go to the sidelines. If you have a problem (or think you do), playing with every lever you have will not help you identify a cause and in reality, you could easily make the problem far worse. If you walk into the Dr. with a stomach ache, they don’t typically prescribe dozens of remedies.
It has been a tumultuous summer and fall. Once Congress acts and the credit pipes begin to become unclogged, let’s just relax on the intervention side for a while and let the market work.
Disclosure (“none” means no position):
Visit the ValuePlays Bookstore for Great Investing Books