Friday, December 19, 2008


"First" of the Day: Fall of the CPI

The U.S. consumer price index [CPI] fell by a seasonally adjusted 1.7%, the [Labor] department reported, the biggest drop since the government began adjusting the CPI for seasonal factors in 1947.

But on a non-seasonally adjusted basis, the CPI fell by 1.9%, the biggest decline since January 1932, at the nadir of the Great Depression.

—Robert Schroeder reporting in "Drop in consumer prices is most since 1932"

The fall in the CPI for October broke a record exceeded only by these new numbers for November.

Last month I noted the worry that we are on the verge of a deflationary spiral. In greatly simplified form it might look like this: Consumers stop buying, factories (the few that are left) stop producing, workers are laid off, laid-off workers stop buying, more factories stop producing, more workers are laid off—and so on, down and down. This forces prices to fall since no one is willing or able to buy. It's the sort of situation that normally only a good war can fix.

But you should know by now that if our pundits and politicians fear deflation, it is not for the sake of workers. It is the rise in the value of the dollar that threatens their constituents.

Investors in the form of private equity funds, hedge funds and the banks have borrowed a great deal of money in order to make more money (quite literally, I'm afraid)—all under the premise that the dollar will continue to lose value. Dollars borrowed today will be repaid tomorrow in dollars that will be more plentiful but worth less, which effectively reduces the rate of interest for those making money off money.

This of course does not apply to workers. Their dollars not only did not become more plentiful over time but lost their buying power as well. Under George Bush wage earners lived to see an expansion of the economy without a corresponding increase in wages—another "first."

All the money rose to the top. So with increasing costs of food, fuel, housing and health care, workers were left somewhat in a pickle. To keep the wheels of commerce greased it was necessary to loan them money—off of which our capitalists expected to make even more money. Whee! But you do not need to be an economist to see that this was a situation that could not continue indefinitely.

To put it another way, while the value of investments was inflating, the cost of labor was deflating. Strangely, deflation in this sector of the economy was not considered a problem at the time.

Of course if the wealth had been more fairly distributed, it would have hurt the upscale real estate market, the yacht market, the art market and the payday-loan market, which was providing a lovely new revenue stream for the banks. But the current economic disaster could have been postponed, if perhaps not totally avoided.

Since our national economy depends upon indefinite postponement of the bills coming due, a more worker-friendly policy over the years—such as a minimum wage tied to inflation—might have kept it going for awhile. Instead the government found itself handing out checks last year in an effort to "jump start" the economy.

By then everyone was too deeply in debt for such a pittance to matter, and here we are today. To the best of my knowledge, amazingly, at the time of the give-away not one politician, columnist, reporter or union leader asked, "But what if we had just paid them more?"

Now comes the news that the value of the worker's dollar rose again last month. Calculated against its purchasing power in 1982-84, the dollar's purchasing power increased from 47.1 cents to 48.2 cents (November CPI report [pdf], p. 18)—more than a 2% increase.

Two percent is a nice little raise in one month. Enjoy it while you can.

Related posts
"First" of the Day: Fall in consumer prices (11/20/08)


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