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The Harsh Side of Deflation - We Measure Ourselves by Our Income

As I discuss deflation with audiences, there is always a sense that a period of falling prices is a good thing.  That’s true if your financial situation is set.  If you have consistent earnings, then falling prices means a higher standard of living.  However, for a substantial portion of Americans, earnings are not set.  I’m referring to the unemployed, specifically as they rejoin the workforce.  For them, the force of deflation rips through their personal lives and leaves catastrophe behind.  Why?  Lower earnings.  In some cases, much lower.

In the past month the WSJ has published two stories on the decline in income for those rejoining the workforce (here and here).  The first recounts a very small study showing a 40% drop in income for those returning to work, the other describes enduring underemployment for those working outside of their previous profession or vocation and earning a greatly reduced income.  Both point to the same thing.  When we are working through a deflationary period, not only do prices fall but so do incomes.  This is what hurts.  Our debts are not tied to our rate of earnings, there is no magic formula that calls for paying a set percentage of your earnings on different types of loans.  We set our payment rates (leaving aside adjustable mortgages for a moment) but our incomes are free to fluctuate.  All of that is fine if incomes are rising, it means more disposable income.  But as incomes fall things get dicey.  Not only is disposable income a term of the past, but bills are harder to pay.  This leads to less spending on the “frills” and also the possibility of debt reduction through modification or bankruptcy.  These forces then serve as a negative feedback loop on the whole deflationary storm.

In addition to the financial implications we have the psychological impact.  In the US, we tend to measure ourselves by what we own or what we make.  As both of these are negatively impacted by deflation, it is possible that we are in the midst of driving down the general mood of the nation.  The outcomes - in politics, movies, songs, books, etc. - are as varied as the means of expression.

This all recalls the curse of, “May you live in interesting times!”