Why is the deflation train coming into the station? Simple. It's because We're Mad As Hell and We're Not Going To Take It Any More!
We've written about it before (and we'll write about it again), but the short story is that our Federal Reserve responded to the 2000-2002 NASDAQ crash with a mad money-pumping policy, and that band-aid solution is currently in the process of losing its stickum.
To make a long story short, that policy made us all feel like we had discovered home equity manna-from-heaven for a while, as home "values" in America ratcheted up (low interest rates and 100% loans will do that to a post-bubble bubble). Everyone from Maine to Hawaii was able to tap the home equity monkey on the shoulder whenever they needed twenty bucks.
But you and I both know that the whole thing got out of control, the entire real estate thing got overspeculated and overbuilt, and too many people got bogged down with too much debt. As the real estate mania exhibits nothing but cracks, the speculators have checked out and other Americans are choosing to pull in their collective horn. The implications of such a trend change are enormous.
The irony is that ultimately this Fed-induced "inflation" will prove itself to be one of the initial causes of asset and select price deflation. Chew on that one for a minute, why don't you?
All the money pumped into the system after the NASDAQ crash ultimately had its affect on crude oil and gasoline, home prices and things like health care premiums and college tuition. The stock market did its three-year dead-cat bounce (although the post-bubble NASDAQ is still down a whopping 60% from its 2000 peak and that is not a good sign at all for the markets, given all the money that was flooded into the system). People felt free to borrow so much because it really did feel like 1950's-style prosperity was right around the corner. "Bonus" home equity was suddenly there and there were 100 quick and easy ways to get your hands on it.
Alas, deflation is coming because one by one, Americans are figuring out that the jig is up. They have figured out that you can't borrow your way to prosperity, and they're hearing about the houses and condos around town that aren't selling. With little savings in the bank (Americans have a national savings rate below 0%), their only alternative is to stop spending money. Deflation is coming because the psychology is changing. From here on out, Americans will prove that we have simply had enough. We are mad as hell and we're not going to take it any more! Translation: From now on -- you retailers, home sellers and restaurateurs -- we're not going to keep borrowing money and you're going to have to compel us to buy.
Can you blame us? Sheesh, even with those "easy monthly payments" all you loan brokers got us to take on, we've got whopping mortgage debt to contend with, not to mention $3 a gallon gasoline prices. $80 to fill up that gas-guzzling truck or SUV that Ford and GM sold us with nothing down? Are you kidding me? To make matters worse, nobody really told us that those home prices you made it so easy to afford would come with whopping real estate tax payments twice a year. And how 'bout that "one year, no payments" thing we took advantage of at Home Depot and Best Buy and Circuit City and Orchard Supply Hardware? What about our low introductory rate credit cards and our prime rate home equity loans? Guess what? We're having to contend with those bills, too. And don't even ask us about health insurance premiums or college education expenses!
"Wait a minute! I owe how much?!" we say, beads of sweat on furrowed brow. "And now you want us to buy more?"
"Fine. Drop your prices. A lot."
Otherwise, we're not buying.
"Employee discounts" for cars and trucks kicked off the waiting game ordinary Americans are now waging against the corporations (and winning, by the way). We decided to stop buying cars for a while and the automakers knew they had to compel us to buy. They lowered prices substantially and, lo and behold, they sold a bunch of cars and trucks. Americans 1, Automakers 0.
Now savvy Americans don't buy unless they get massive discounts, or 0% financing, or both. It doesn't take very long for people saddled with massive debt to figure stuff like this out.
My email inbox is flooded with "15% off if you order today!" offers. "35% off your next order!" they scream. "Free shipping!" they say. "Employee pricing!" they cry. "No payments, no interest until March of 2007!" they trumpet (oh, no -- not again).
Other examples are popping up, too. Casual dining restaurants have seen their numbers drop from the same period the previous year. Analysts say that cash-strapped Americans are saving money by cooking at home or by going to less-expensive fast food restaurants instead. Looks like casual dining restaurants will have to lower their prices, too. You might as well, fellas; from here on out, we'll be demanding it.
You think they're lowering the price of computers every couple of months because the computer guys want to cut you a break? You might want to give the folks at Dell Computer a call. Poor Dell -- the only way Americans will buy their computers is if the quoted price is simply too good to refuse.
Actually, give Dell credit; they have this deflation thing figured out. They kept offering a growing list of rebates, coupons and incentives to compel folks to buy (while watching their stock value get cut in half). After a while, all the discount tricks looked so ridiculous, Dell just threw in the towel, got rid of the so-called "incentives" and permanently lowered prices. (Their prices are so low now, their computers have begun to burst into flames).
Ads in the local paper for big screen TV's feature ditties like, "Previously $3499, now $1999 -- Free delivery and set-up!" (For you debt-addicted folks out there, Mitsubishi will be happy to finance you for a year, zero interest).
"Looks like all I have to do is wait a few months and the price will be lower," savvy (and cash-strapped) Americans are figuring out. The fact is, they're right. All that remains is to understand the full implications of this early trend.
Homebuilders are catching on, offering free custom upgrades or extras or free swimming pools, even showcasing "$50,000 discount days." Americans are backing out of contracts. They're "waiting 'til the price comes down." They're demanding lower prices and, by George, they're getting them.
And it's only the beginning. Wait until everyone catches on that if you wait six months or until next year, the prices will be lower still.
Wait until this deflationary psychology takes hold completely.
Asset deflation. Market-by-market price deflation. Declining interest rates, falling commodity prices, a debt-induced slowdown in the post-bubble, post-bubble-bubble economy. It's all coming, folks. Brick by brick. In fact, it's unfolding as we speak.
Real estate is the linchpin, just like it was in Japan after their Nikkei bubble popped in 1990. Real estate values there continued to rise for a couple of years (after their monetarists dropped their interest rates to zero), then real estate deflation began to take hold. When "everyone" figured out that real estate would cost less if you waited a few months, there was absolutely nothing that could be done to turn the psychology around. People stopped borrowing on their declining home equities, too.
Real estate values in Japan fell for twelve consecutive years.
In the United States in the coming years, lower prices across the board will not only be the rage, but a necessity. The deflation elephant will squash inflation like a gnat.
Of course, we could wait until next year to write this. At that point we'll likely be in agreement that real estate deflation is a fact of life. But we'd rather put it on the table now and give you a chance to make important financial decisions while you still have a chance.
We have embarked upon a decade (or more) of real estate deflation here in the U.S. That will be enough to pull down prices across the board. All that's left is for people to talk about it at cocktail parties.
And when they do, they'll say it was because They Were Mad As Hell and They Weren't Going To Take It Any More!
Plus they ran out of money.
