All Deflation is Not Equal

Rodney Johnson | Tuesday, April 30, 2013 >>


Anyone who’s been to Puerto Rico knows that life on the island moves at a different pace. Even though it is technically a territory of the U.S., and it shares many economic traits with the U.S., there is no question that Puerto Rico life simply moves at a slower speed. Many would say this is a feature of the island, not a bug.

Something else not lost on people is how beautiful the island is. From the historical streets of Old San Juan to the canopy in the rain forest, Puerto Rico is a land quite rich in beauty…

Yet something in Puerto Rico is not right.

It doesn’t matter how pretty it is, or how relaxed its people are, the finances of the island are atrocious. Its bond rating is low. Its deficit is high.

What would happen if the island was forced to right its financial ship immediately?

Well, some things would change. People would lose jobs as the government cut back dramatically on employment. Retirees would lose some benefits. Islanders would be forced to pay higher taxes, so they’d have less money to spend. All of this would affect businesses on the island, which would see their own receipts suffer.

In time – maybe after six months, a year, maybe even two – prices would fall to reflect the lower level of demand.

Some things would not change…

The beaches would still be fabulous. Old San Juan would still be a cool place to have a Mojito. The rain forest would still be one of the best places to hike in the Caribbean.

When you combine these two sets – things that change and things that don’t – you come up with an interesting situation that strongly favors one industry… tourism.

Puerto Rico would be an obvious destination for Americans who use the same U.S. dollar as the island, but can now make their dollars go further as prices fall. Yes, there is a pesky language barrier, but people have muddled through that for centuries.

While this scenario is not playing out in Puerto Rico, it IS playing out somewhere else, which is why we should care.

After years of austerity and hand-wringing, the Greek economy is finally going through deflation. Wages have fallen, jobs have been lost, asset prices have tanked, and retail prices are dropping to reflect the new reality.

But citizens of other countries who use the same currency, like Germany, are not experiencing deflation. Their wages are still strong. So what is the natural decision? To vacation in Greece, of course!

Expect the holiday season in Greece to finally show some life this year. Not because the Greeks are in a better place, but specifically because they are in a worse place economically, and citizens of other countries are eager to take advantage of it.

Because of the shared currency but individual budget policies, there is a growing disparity between the experiences of citizens in different countries. These differences can, and will, be exploited.

This is one more example of “me-o-centric” economics. It’s like rushing to a store that is going out of business, hoping to cash in on a good deal that was brought about by the store’s misfortune.

One interesting note is that if there is a significant increase in tourism this season due to lower prices in Greece, then it will actually serve to bolster the local economy and therefore ease some of the Greek pain. In an odd way, the greater their financial misfortune, the more likely they are to attract tourists, and the faster they’ll likely recover.

Odd indeed.

Rodney

 

 

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Categories: Deflation

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.