Leadership Simplified: Doug Van Dyke

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Economic 411: Deflation then Inflation

Since the U.S. economy has taken a bit of a detour from its normal cycle of growth followed by a 10-month recession, I thought it might be of interest to examine future pricing trends. The real estate meltdown is a case study in deflation. By definition, deflation is a “persistent decrease in the general price level of goods and services" - sounds like a description of the U.S. real estate market to me. Many sectors, retail for example, are following real estate’s decline in prices. While a decline in prices may be a good thing for some, it is not good overall. Declining prices can accentuate the contraction we are experiencing in the broader economy. Side bar: deflationary pricing coupled with a stalled economy combines to form stagflation – a situation our economy has not experienced since the Carter administration. Back on task: In response to our economic situation, the Fed is printing money like crazy in order to stimulate things. The pumping of dollars (approximately 1 trillion of them) into the economy should get our economy wheels moving forward and back into growth mode. Yeah, right? Well, hold on to your hat. Once the economy gets moving forward the Fed will need to raise interst rates like madmen. Why? Because inflation will be readying to take off. With trillions of excess, manufactured dollars flying around, coupled with the multiplier effect of a positive economy, prices will escalate – quickly. The Fed’s standard action to fight inflationary pressure is to lower interest rates. Our Fed Funds rate is essentially zero right now. Thus, as soon as the Fed is able to raise the Fed Funds rate, they will, they must. So that they can then, turnaround and quickly lower interest rates to fight rising inflation. Yes, yes, the Fed is in a peculiar predicament. So what the heck does all this have to do with you? Several things:

  1. In the near term there will continue to be pressure in certain industries to lower prices.
  2. If the economic stimulus package works, and people stop freaking out and actually focus on their business (something they can control), we could get out of the woods by mid-fall ‘09 – it may not feel like it, but there will actually be a clearing to walk in.
  3. There will be opportunities to increase prices in the not too distant future. You might as well lead the band wagon rather than follow it. Look for your opening and seize the day.
  4. At some point in your strategic planning, take increasing prices into consideration. The expense side of things will be higher in 2010 than you are anticipating – don’t get caught with your pants down. Prepare.

Well, there you have it, one person’s take on what the heck is going on – and going to go on. I welcome your insights and opinions. Be well.

Posted by Doug Van Dyke on 2009-06-03 at 05:52 AM
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