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Great Recession at 30 months

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July 01, 2010 – Comments (3)

Financial Armageddon linked to this article, Great Recession at 30 months.

I have stated that I am in the deflation camp, and I remain in the deflation camp, although I do keep my eyes open for signs that it could turn around.  Once the massive debt overhang is cleared and deleverage has finished, then the stage is set that you can see a return to an expanding money supply, however,  I think that it will take a few years yet for the current economic problems to work themselves out.  And it remains to be seen how the economic problems work themselves out with a massive aging population.  Japan comes to mind as an economy to look at that had massive debt deflation and an aging population to contend with, only they were dealing with it in a much stronger world economy.  I don't see how Japan's strategies work for everyone when everyone needs them to work at the same time...

The data from the linked survey is pretty strong in showing the degree that household's have suffered financial loss due to employment issues.  More then half have suffered some kind of employment set back in the past 2.5 years.  More then half say they have cut back on their spending.  About half say they are in worse financial shape then before the recession started.  More then half the workers in their 50s have plans to delay retirement because of economic changes to their finances from the recession.

Now, I am amazed that people believe their home values will return in 3-5 years.  I suppose it depends to some degree what you expect it to return to and where you live.  When I bought my home in 2003 I remember at the time thinking it was never going to increase in value and just remain flat for years as it was so expensive.  However, the housing bubble hit with a gale force and I sold my home for 60% more then it was bought for in 2008, and I did not sell at the absolute top and home prices in Vancouver have not yet declined.  Vancouver's housing bubble is unique in this economy because of the Olympics.  There has been a rash of buying from wealthy mainland China, and BC's population has increased faster then anywhere else in Canada.  But, with average home prices something like 8-9 times average household income, it is not sustainable and there will be a correction at some point.  They did dip a bit prior to the foreign buying.

I am still expecting a good part of that gain to disappear.  From the start I have said 2012 is the earliest to look at the Vancouver housing market, but with the Olympics, that may still be early.  After Expo 86 Vancouver saw home prices dramatically increase each year until 1993.  But home prices were such that it wasn't just the wealthy that could afford to buy here.  Locals could afford to buy.

Anyway, the data showing the reduced spending and reduced employment simply suggests there will be some deflation.

Also, as people reduce spending, business has to become more competitive and profits have to be squeezed.  And that simply does not allow for wage increases, or even job security.

3 Comments – Post Your Own

#1) On July 01, 2010 at 3:45 PM, dbjella (< 20) wrote:

I know there are technical definitions for inflation and deflation, but for me, inflation represents the change in price (cost to me) to buy the things that I need or want. 

I don't really see deflation in most of the things I need or want. 

First off, I live failry frugally, but since the start of 2009 my hrly rate has been 20% less.  I know that has nothing to do with prices, but to me it sure would have been nice if prices would have fallen 20% :)

I took my sons to Dairy Queen for a small sundae and McDonalds for happy meals.  The price has definately gone up for both stores that I visited and the small sundae appears to have less DQ than the sundae I remember.

Comcast cable and internet has gone up slightly.

Electric, gas and water are about the same.

Initially, I saw grocery prices fall at my friendly Walmart in 2009, but they have returned and gone up in my opinion.  My coffee beans are about $.30 higher.

I buy the kids snack size portions of Dorritos and the serving size has definately gone down,

Rent has stayed the same and I am not sure if an abode would be higher or lower.

For me, the only thing I can think of that has gone down is the price of gas.  Oh yeah, an oil change at Walmart went from $15.99 to $19.99.

I just don't see deflation, but maybe things are different at a macro level.

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#2) On July 02, 2010 at 1:18 AM, BigFatBEAR (29.24) wrote:

I think economists say prices are somewhat "sticky"...   that they don't move quickly, and perhaps there's more resistance to downward pressure, esp. on the part of retailers and corporations.

That said, a 20% less hourly rate since the start of 2009 definitely DOES have to do with prices! The demand for labor is less, and thus pay is less, because the economy is so bad.

It'd be nice if we could see some of the energy and food price savings we deserve, and in my opinion rents can and should go lower for most places...   but the market mostly ignores my opinions. ;)

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#3) On July 02, 2010 at 11:50 AM, dwot (61.86) wrote:

dbjella, I actually saw hotel rooms for $49 on my drive to Vancouver.  The prices I have seen the last 3 years range from $80-120. 

I think a lot of businesses have been offering more sales.  No question DQ is overpriced, as I went into one this week and it left no appeal to ever go back to a DQ...

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