Tuesday, October 28, 2008

Deflation A Sure Sign Of A Deeply Troubled Economy

Under normal circumstances the steep drop in world oil prices would be a positive signal and would have the effect of creating a sharp boost for the economy by freeing up billions of dollars that would normally be spent on energy sector costs almost like the $700 billion dollar bailout of the troubled financial segments in the U.S. should eventually accomplish. However, such a sharp drop in oil prices, as well as falling prices in many other sectors is actually part of a frightening financial problem that is identical to the same economic problem during the Great Depression that took place after the 1929 American stock market crash, deflation.

Deflation occurs in a very sick economic environment when consumer spending has dried up due to a lack of cash in the hands of the consumer market, high unemployment, and also a landscape of businesses where demand for goods are so low that cutting prices just in order to survive in business becomes a life or death necessity.

A direct parallel was during the Great Depression when 78rpm records that once sold for an average price of $1 each where replaced with new Depression era records with a lower price of just 10cents each that where made from far cheaper materials including more rag, paper and shellac content. These Depression era records were known for their rough and noisy playback compared to the far better quality preDepression recordings, but these lower priced recordings did manage to keep some companies in the American record business around to survive the Depression.

Other American companies managed to survive the Depression in other interesting ways. The Auburn-Cord-Duesenberg automobile company which built high priced luxury automobiles watched their sales collapse as even the normally wealthy buyers were unable to purchase their higher priced luxury products, but only managed to survive with the help of Roosevelt-era government purchase efforts to buy massive amounts of kitchen cabinets from this company which was forced to sharply curtail automobile production in favor of retooling their production lines into building household items such as the kitchen cabinets for new government programs to build new homes and get the housing market back up and running again. FANNIE MAE, the home loan giant was a creation of the Roosevelt Administration that helped to provide loans so that American consumers could purchase homes and get this sector of the American economy up and running again after the steep crash during the Republican Hoover Administration.

The Obama Administration will likely have to follow many of the examples of the Roosevelt era and offer a number of unique partnerships with key industry sectors as well as propose a number of new temporary spending programs that create jobs to get unemployment down, and money back into the hands of consumers to get the economy rolling again. Even his middle class tax break proposals seem to follow along these same lines of Roosevelt-era reasoning of getting money back into the hands of consumers to stop the economic free-fall that the Bush Administration allowed to creep up and now grow so out of control.

Little doubt the economy will actually tend to worsen for at least a few months into any new administration. However, compared to the expected relative inactivity of a McCain Administration to attempt bold new plans to rescue the American economy, the Obama plans to rescue the American economy should move relatively quickly with a cooperative senate and congress both in Democratic hands to quickly respond positively to the serious economic issues at hand.

Just this week, John McCain's own advisor on automotive industry issues claimed that the American automobile industry cannot be rescued from "their own bad decisions". However that is not a realistic outlook when millions of American jobs are somehow related to the American automobile industry at some level including manufacturing, parts or dealerships. And indeed, it is also the American automobile industry that is vital to the nation's defense needs as well. While the McCain Campaign has sent mixed signals on the extent to which they would work to ensure that the American automobile survives, still McCain's own philosophy of occasional stubborness and noncooperation makes McCain a risky choice in acting as a reliable partner to ensure the survival of this key American economy segment.

Barack Obama appears to be by far the safer choice on economic issues and much more likely to work in a centrist manner with all economic segments to get the American economy back up and running once again and money into the hands of consumers. By comparison, the worse thing that the voters could do is give John McCain or the Republicans yet another chance to further sink the economy. Under the Bush Administration there was a mandate to make the economy strong during this eight years of rule, which didn't happen, and instead most Americans are now somehow touched by all of the current serious economic problems.


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