Deflation In The Economy

[Adamski]

Guys,

What is deflation and how might it affect our economy? Deflation is the devalueing of goods or services over time. In other words, it's the opposite of inflation.

Consider this - one industry has undergone deflation year after year for decades. Can you guess what industry I'm talking about? Yes, it's the electronics industry. Consider the Plasma TV, for example. I saw the first Plasma TV about 20 years ago at a home show. It was about 32" diameter and displayed in a darkened room to enhance its viewing impact. I asked the salesman what something like that would cost. His reply was $30,000. Well, we certainly have come a long way in 20 years because today you can buy a Plasma TV that size for about $400.

TV prices have fallen and continue to fall due to production efficiencies and the development of replacement electronic products. The LCD TV has surpassed the Plasma TV in popularity. Plasma TVs are already old school and tube TVs are non-existant in stores for the most part.

How do TV retailers keep up with falling values? Certainly they must sell older models before they fall below their wholesale cost. It must be challenging, at times, to keep the older stock from getting too old.

How is the customer affected by the ever decreasing prices? If you're like me, you walk into an electronics store like Best Buy and you see all those fancy LCD TVs and you drool a little as you picture one in your home. Then you look at the price and it's maybe $1,200 (for the big one that you really like) and you say to yourself, "I think I'll just wait until the price comes down some before I buy it." That thought you just had in the electronic store is what's so bad about deflation.

An economy in deflation is an economy in which consumers are delaying purchases (of all types) with the expectation of saving money by buying later. With everybody putting off their purchases until "later"; the whole economy grinds to a stop. Think Great Depression. You don't want to see our economy move from flat (no inflation or deflation) to deflation.

[STOUT]

Is there a possibility that could happen in the laundry industry? I wait for falling prices from distributors on equipment. Granted they usually do not keep great depth of inventory. That is why we have to wait for shipments from the factory on some of our orders. Or when they have a dealer show and the terms and prices are better. Am I trying to push along deflation in our industry?

We go to time of day pricing and reduce our prices to move customers to other user habits. Or we loss lead a particular machine or give away free soap or free dry to increase or TPD or to take away customers form other mats to increase our customer base.
Do we push along inflation by being touted as the highest mat in town? Yet we provide excellent service to go along with that price increase?

Yes I am a capitalist and am enjoying the fruits of my labor. There is nothing wrong with that. I too need to raise my prices in my mat but I have a competitor just less than a 1/2 mile from who has ridiculous prices in both washer and dryers. I have spoken with him about his prices and even pointed out if he is making any money at the prices he is charging. .75 for a top loader. 2.00 for a 30 # front loader. .25 for 10 to 12 min. on a 30 # dryer.
He has in some cases older equipment but in a couple machines they are newer.

What to do? :confused:

[pressandclean]

The days of free markets in the U.S. are over! Whether we have inflation or deflation now rests in the hands of the government. Their goal is to provide a stable business environment to prevent anarchy. Just like China and Russia, we are now in the beginnings of having a planned economy.

[Howard]

Yup that is what happens when you get to the point that over 50% of the population pays ZERO in Federal income taxes. They vote for idiots that will give them everything for free and raise taxes on the "rich". If things don't change quickly it will all be over soon.

[SonomaJoe]

Guys,

What is deflation and how might it affect our economy? Deflation is the devalueing of goods or services over time. In other words, it's the opposite of inflation.



Larry,
Did someone put bad cream in your coffee this morning?! Yes, Deflation is the worst of all worlds. People delay purchases, in turn compaines lay off more workers, & the negative spiral is very hard to stop.
Personally, I trying to think about the things I can affect, not whether Zardari seeds control of Pakistan's nuclrear command structure to his Prime Minister, or if Deflation is around the corner

[Adamski]

Larry, Did someone put bad cream in your coffee this morning?!

Joe,

I can't help it. Sometimes I just wake up in the morning thinking about some new subject and I just have to share it with everybody. That's just the way my mind works. Anyway, enjoy your coffee...

[James2011]

price drop like TV industry....
well, there are many example...
see the HOUSE price drop....
So, some people( normal people) has been waiting long time for the house price drop and some still waits....they still live in apartments....
They don't see the big pictures...
why human being lives?
what we live for?
how long can we live?
do we live one time or twice?
the answer is we live only ONE time, single life...
if you getting older and older and time passed, then what does it mean to save $$ by not spending money and by waiting more years the drop of price...
That's stupid,
My philosophy is we need to buy something when we need it, no need to wait over a couple of years...
for example, computer, the price has been down and down, but if we use it for better purpose or better life, we better buy it and use it...

[wdbgelaundromat]

Electronics really are a great example. I think deflation in electronics is also tied to supply and demand. Look at the iphones they debut with price tags of $499 and they have people lining up and getting on waiting lists. They release them before they have a good production finsihed and distributed. Then when they flood the market with them they start cutting the price. When the prices get slashed they start working on the next model to rush to market. They know that the customers are always looking for the next new thing.

[DaveLevenson]

Deflation is very hard on distribution businesses (wholesale and retail). This is because a distribution business needs to keep inventory on hand to be distributed (i.e. sold). The inventory loses value as it sits on the shelf. Think about the gas station that filled its underground tanks with thousands of gallons of regular gasoline just before the price dropped by 50 cents/gallon!

We are mostly service businesses. Deflation is far easier on service businesses. We have virtually no inventory. If our costs of equipment and utilities drop, we can probably lower prices if the competitive community requires it, but we are not losing money we have already spent. If we have cash in the bank, its value (i.e. purchasing power) increases with deflation.

Our problems with deflation occur when we are leveraged. We borrowed cheap dollars and are probably required to repay our loans with more expensive dollars. So, if we expect deflation, we should attempt to maximize cash and minimize debt.

[thinkclean]

Is there a possibility that could happen in the laundry industry? I wait for falling prices from distributors on equipment. Granted they usually do not keep great depth of inventory. That is why we have to wait for shipments from the factory on some of our orders. Or when they have a dealer show and the terms and prices are better. Am I trying to push along deflation in our industry?

We go to time of day pricing and reduce our prices to move customers to other user habits. Or we loss lead a particular machine or give away free soap or free dry to increase or TPD or to take away customers form other mats to increase our customer base.
Do we push along inflation by being touted as the highest mat in town? Yet we provide excellent service to go along with that price increase?

Yes I am a capitalist and am enjoying the fruits of my labor. There is nothing wrong with that. I too need to raise my prices in my mat but I have a competitor just less than a 1/2 mile from who has ridiculous prices in both washer and dryers. I have spoken with him about his prices and even pointed out if he is making any money at the prices he is charging. .75 for a top loader. 2.00 for a 30 # front loader. .25 for 10 to 12 min. on a 30 # dryer.
He has in some cases older equipment but in a couple machines they are newer.

What to do? :confused:

I hear your pain. Finding a sweet spot between volume and price seems very difficult in this environment. I have a competitor 1.5 miles away running $1 wash on 20lbs Tues-Thurs from 6am-6pm. For the longest time I pondered on following with a variation on my 30lbs but sat on it to prevent changing customer habits and moving traffic from good margin days to low margins days. Some savvy customers that know the area's mats say that store is dirty and $1 machines are hard to get after after work during those three days. These same customers value our dedicated seating area with a coffee table full of nice magazines, a flat screen to watch TV, free WiFi access, ample parking, open layout (based on Adamski's ratio of machines to parking/machines/carts/seating), and we're the cleanest in the area.

I believe this type of competitor is utilizing a short term strategy by using volume to get to an absolute dollar amount, at the expense of margin. While this is one way to run a business, it has longer term implications: 1) wear and tear increasing MRO cost, 2) lower quality customer mix, and 3) no room to defend against rising utilities.

Conversations with other business owners in and out of our industry tell me everybody is down in sales yr/yr. As mentioned by other posters soft-goods retailers need to discount to move seasonal inventory before fashion falls out of favor and hard-goods retailers need to move room for cheaper goods coming in before their older inventory is obsolete as well. We're not in the manufacturing business where we can increase through-put and cut material waste via lean techniques. We're in the SERVICE industry with no economies of scale. For the uninitiated this means our margins don't increase at a faster rate than sales.

There is no reason to discount heavily but act rationally. There's reason to be sympathetic to general unease with 10%+ unemployment rate, flat wages/zero bonus, and anxiety from rising taxes. So this is what I do... I offer 25c off for warm and 50c for cold water usage, empower the customer to save when they want based on what they need. I also give away laundry bags that make a difference - they are made from recycled plastic bottles, sturdy double stitched and designed with our logo. It reinforces our green express theme and every time I give one away I make one customer smile and that customer greets me the next time we see each other.

My point is to encourage more owners (esp those lurking) to charge reasonable prices for a good if not great service. Because if we go wholesale and develop and ingrain a certain low-end feel we're out of position when pricing comes back.

[SoooperDave]

Both inflation and deflation can be painfull. But what is painfull is the inability to predict it and not prepare for it. A steady rate of inflation wouldn't be so bad but big unpredictable jumps are tough. Between the 2 evils, deflation is far harder on this particular society because we are a net debtor society.
However, I think the odds of a deflationary cycle taking hold here in this country is extremely low mainly because I think our leaders understand the magnitude of the problem and as Bernanke once said, he'd be willing to drop money out of helicopters in order to stop it if necessary.
It's hard to imagine a country NOT being able to debase their own currency if they are determined to do so.
Having said that, Japan tried to do this unsuccessfully in the last decade. But their situation was slightly unique in that they have a decreasing population which puts a drag on their GDP and growth. I believe Japan is the only known example of a government that was so inept that they couldn't even debase their currency.
In our country where population and households grow at 3%, our GDP growing at 3% is just treading water. M2 has grown quite a bit in the last year and our twin deficits (trade and budget) will have to be paid for, and i don't believe this can happen without debasing our currency significantly.. I think the odds of some significant inflation in the next decade are very very good. Good time to lock in your rent rates for a few decades.

[pressandclean]

I wouldn't worry too much about inflation. Obama & co. will use price controls. Worry about shortages.

[Howard]

Yes Japan is unique. One-Third of their population is over 65 years old and they have over 40,000 people that are over 100 years old.

It really does not matter if we have inflation or deflation as the idiots in DC plan to take all the money from those of us that are productive and give it to those that believe they were put on earth to collect welfare. It is against their civil rights to not have 50" TV's, free highspeed internet and live in houses they cannot afford. It has already started.

[SoooperDave]

Price controls have never worked, and many believe the price controls of the Nixon administration led to even worse inflation of the 70's.

This book by Samuelson is a very good documentary on the "Great Inflation".

http://www.amazon.com/Great-Inflation-Its-Aftermath-Affluence/dp/0375505482

[SoooperDave]

Well Howard, I'm not quite as cynical as you (but I'm close).
Oftentimes these Wars that we get ourselves into every 5 yrs or so are paid for by increased taxes and/or inflation.
So far, we've not increased taxes but even drastically increased taxes cannot extricate us from this hole.
Our recent wars have been paid for mainly by the Chinese through our trade deficit and subsequent treasury sales.
We say we want a strong dollar to keep the treasury spigot flowing, but it's in our best interest to have a weakening dollar.
When the treasury stops buying mortgage debt in the next 6 months or so, who will step in to keep rates low ? There is noone.
To anyone out there who thinks we can continue this way as we have over the last decade.....
Good luck with that bet.
I think you'd have to break a few rules of mathematics and maybe thermodynamics to think we won't have some significant economic problems over the next decade.
And the responsibility of this fiscal mess should be largely shared by both major political parties, imo. We tend to perpetually put off tough choices. This cannot and will not continue indefinitely.
...........and long term, i'm optimistic about this countries economy.....really!

[James2011]

rumor says US $$ will gone away....
and new MONEY which represents Canada, USA, and Mexico will come out in a few years...
believe it or not...

[Adamski]

rumor says US $$ will gone away....and new MONEY which represents Canada, USA, and Mexico will come out in a few years...
believe it or not...

The mysterious Hithere is referring to the Amero currency/coinage system that has been debated previously on this BB. The theory is that the Amero dollar will replace the Canadian and American dollars as well as the Mexican 1000 peso bill. The entire continent would then be under a single currency/coinage system. Is this true ... will it happen? Nobody knows for sure but if you Google Amero, you'll find an Amero coin image.

[pressandclean]

Except for people, like laundromats, that actually use the individual denominations of coin and currency, it doesn't really make any difference since the value is ficticious anyway. Whether you call them Dollars or Ameros, they're still I.O.U.'s.

[DaveLevenson]

It really does not matter if we have inflation or deflation as the idiots in DC plan to take all the money from those of us that are productive and give it to those that believe they were put on earth to collect welfare.

Who is John Galt? More to the point, now that we need him, Where is John Galt?

[James2011]

who is J.G.??

[STOUT]

Who is John Galt? More to the point, now that we need him, Where is John Galt?

Dave;
We sure could use John right now. Maybe he is is still in Colorado!
They should make a movie about him. It would turn out interesting.

[James2011]

John Galt ~
"I swear by my life and my love of it that I will never live for the sake of another man, nor ask another man to live for mine."

The enigmatic John Galt is the male hero of Atlas Shrugged, and typifies the Randian hero. By trade, he is an engineer, and has developed a revolutionary new motor powered by ambient static electricity that has the potential to change the world. However, in disgust at the collectivization forced upon him at his workplace at the Twentieth Century Motor Company, he goes on strike, depriving the world of his invaluable invention.

To increase the impact, he persuades each individual of talent whom he considers to share his own ethical creed, to join him on strike, in a secret and secluded hiding place called Galt's Gulch. Amongst them are Francisco d'Anconia and Ragnar Danneskjöld, with whom he had studied at Patrick Henry University. At first, Dagny Taggart considered Galt to be a destructive force, and grants him the epithet 'the Destroyer'. However, when she is convinced of the futility of her own struggle, and the nobility of Galt's, she falls in love with him.

John Galt's name is enshrined in the question "Who is John Galt?" The phrase is used popularly as an expression of helplessness and despair at the sorry state of the world. The answer is expressed in a range of legends: none of which is entirely true, but all of which reflect an aspect of his achievements and labours.
Wikipedia article for Atlas Shrugged

[STOUT]

newbie123;

Nice job on copy and pasting.
Wikipedia makes it happen!

[SoooperDave]

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

Anyone worried about deflation should read this speech by Bernanke in 2002.

IN-flation is something that is more important to prepare for, imo.

[Adamski]

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
Anyone worried about deflation should read this speech by Bernanke in 2002.

Dave,

Okay. I've read Bernanke's speech that he made on 11-21-2002. His speech addressed the causes, effects, prevention and elimination of deflation. I found it interesting and more than a little disconcerting as he spoke about the 10+ percent deflation of the early 1930s. He linked rising unemployment, bank failures and wide spread falling demand for consumer goods and services to deflation in the economy.

Ben Bernanke also addressed Japan's current long-running deflationary cycle and attempted to explain why the Japanese have failed to stop deflation in their country. He explained that our situation is different than Japan's because we don't have a huge Federal debt like Japan has and our politicians are not disagreeing on how to manage our economy. Remember, he's saying this 7 years ago.

He summed up his speech this way: It is much better to prevent deflation than to try to eliminate it after it has taken hold. If we get deflation, the Fed can still fight it even though the fed funds rate is already zero bound (roughly 0%). The fed can effectively lower longer term interest rates too; however, since this has never been tried before, the cause/effect of lowering these rates is unknown and unproven. The fed could also devalue the dollar by printing more money to increase our national money supply (M1). This would basically cause inflation which is the opposite of deflation so, in theory, deflation would go away.

Whew! So ... why don't I feel any better now?

[pressandclean]

And, this year the Fed has been attempting to keep long-term rates low by buying treasury bonds.

[SoooperDave]

Yea, your right not to feel better, imo.
The interesting thing that this was 7 years ago is how prescient the speech would turn out to be, i doubt he thought this would actually happen.
I truly doubt the Fed will be unable to stop deflation, they will literally hand out money if need be to stop deflation, it will be stopped at all costs because it would be sooooo damaging to todays debtor us society.......but the price to pay is inflation which will also be difficult and painfull.
Interest rates are artificially low due to the treasuries buying of agency debt, mortgage debt and treasuries......this is supposed to be phased out in the next 6 months and China which has been the largest US debt buyer of the last 10 years has curtailed their debt purchases just as the treasury stepped in to keep rates low.
I don't see how interest rates stay low or the dollar doesn't fall significantly from here.
Maybe I'll be wrong, but the economic pain we've experienced so far is FAR from over in my opinion.
Interest rates going up will put downward price pressure on ALL asset classes.