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The Downside of Deflation - Lower Incomes

For several years I’ve been teaching a two-day workshop that we call Demographic School.  The point of the workshop was to give attendees a full understanding of how we view the world, kind of looking at the economy through a demographic lens.  Part of this involves reviewing historical periods like the 1930s.  I always mention deflation as a time when prices fall, which sounds great.  The problem with deflation is that not only do debts remain constant, but incomes fall as well.  The early signs of falling wages are here, and the long-term ramifications are not comforting.

Professor Kenneth Couch did a small and obviously not exhaustive study of workers in CT and found that those returning to work after a period of unemployment were taking an average of a 40% pay cut.  As the WSJ reports, in previous downturns the pay cut was not as large, and it still took 6 years for workers to regain 80% of their previous pay. 

In the next 12 months, look for wage growth to go negative.  The implications for foreclosures and consumer spending are obvious.