When you’ve eaten bad sushi, what’s better for you:
- Do everything you can to keep the poison in your system indefinitely?
- Let nature take its course?
Yeah. It’s a no brainer. Unpleasant, but necessary.
Why then can economists, the Fed and the government not see that their efforts to hold back this natural period of deflation we’re moving through right now are only damaging our longer-term growth prospects?
Austerity and this economic winter season have long-term payoffs. Twelve in fact…
And here they are:
- Costs of living come down. Houses become affordable again. Interest rates come down, making loans cheaper. Health care and education costs return to acceptable levels again. All of this leads to a higher standard of living for the next generation.
- Business costs move lower. Commercial real estate costs fall, thus lowering the costs for businesses. Educational, health care and governmental entities, which are real-estate intensive, also enjoy lowered costs.
- Massive amounts of private debt is restructured. I’m talking about $42 trillion being restructured to somewhere near pre-bubble levels, at $20 trillion. Such a restructuring would lower principal and interest-rate costs by as much as $1.5 trillion a year for decades. That is the ultimate stimulus plan, which benefits the private sector directly.
- The toughest survive. The survival-of-the-fittest struggle in businesses shifts market share to the strongest, giving them greater scale and lower costs that they can pass on to consumers. This is one of the best ways to raise our standard of living.
- Long-term entitlements are restructured. The reality is, we live longer today than we did decades ago. As a result, we’ll stay in the workforce longer. We’ll have no choice. How we plan for retirement adapts to consumers who will earn, save and spend more over their lifetimes. The peak in spending will still occur among those in their late forties, as their kids leave the nest, but the slowdown that follows won’t be as extreme and the next boom will be stronger.
- Commodity prices fall. From food to energy to materials like copper, lower prices help to lower the cost of living, especially in emerging countries that consume more commodities. Commodity exporters hurt at first, but an even greater commodity boom will follow (from around 2023 to 2038).
- Dictatorships in emerging countries will fall. This will put such countries on an economic path toward democracy and economic development. They’ll see more transparency and there will be a second democratic and network revolution in business in developed countries.
- Developed countries will become more eco-conscious. They’ll realize, as their demographic trends continue to slow, that they will most benefit from investing in infrastructure and cleaner energies in emerging countries, which will accelerate their development and lower global pollution… a win-win situation.
- Restraints on global trade and immigration diminish. Natural restrictions on trade and immigration early in the crisis typically makes the global downturn worse, but ultimately it will cause more nations to realize that free global trade and immigration are for the best. Thus, globalization accelerates and specialization of labor and trade expand in the economic spring season that follows this deflationary crisis.
- Developed countries trend into higher-value, customized products and services. They realize they can’t compete in commodities and low-cost labor industries, so they move more rapidly into customized goods and services through network organizations that operate from the bottom up. This trend creates a new, mass affluence in the developed world that passes down into the emerging world over time.
- Income inequality decreases. During the fall bubble boom, which ended around 2007, most of the benefits went to the top 1% of income earners who were the innovators and financiers. During this deflationary crisis, the 1% loses wealth and income on a relative basis as their innovations move mainstream and benefit the everyday worker. The middle class is restored to a higher level, with greater gains in income and wealth.
- New technology becomes a forceful driver. Finally, long-term innovations in technology emerge out of the economic winter season. I’m talking about things like nanotechnologies that can make something out of nothing, robotics that take over everyday functions, 3D printing that makes products right in your home or office, and biotechnologies that replace and regrow organs or create cleaner, more affordable energies.
All in all, while allowing nature to take its course is painful, unpleasant, and often times terrifying, it simply must happen so we can move forward… so we can enter the next boom period and flourish.
Now, if only those in power would wake up to that fact and stop acting like idiots!
P.S. Deflation is just one of three major forces bearing down on us this decade. I explain the other two and why we’re in for a rough ride in this interview. Listen now.
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Gasoline prices have been climbing steadily since 2009. But it’s about the only commodity that’s sustained such a strong upward price-trend these past five years.