I think I read the paper differently that a lot of other people. I read it in English, from left to right and top to bottom like everyone else, but in my head I see themes. Each story isn’t a separate report; instead all the stories turn into a mosaic that paints a picture. What that picture conveys changes of course, but the process remains the same.

Right now, as I read across many publications, one theme stands out – deflation.

I’ve talked about this many times, so there’s no need to rehash how this plays out through demographics and slack demand. In line with this is the recurring story about flat incomes, which is part of any discussion on deflation, but is also something I’ve discussed at length.

What’s at the front of my mind today is the many ways we’re seeing deflation creep into our economy like threads of a tapestry.

[WI-Gold-$750-Banner-Collapse-of-Gold]

New cars were sold in November at a blistering pace… sort of. While manufacturers were pushing them out the door, the models were building up on dealer lots.

The cars that were sold to consumers went out the door with more incentives, lowering the price paid from last year by $200.

So far, holiday sales are off this year, but in a weird way. While the National Retail Federation estimates that two million more people are out shopping, their average spending dropped by 3.7%. This led to a fall in Black Friday weekend sales of $2 billion.

Yes, Cyber Monday sales shot higher, but the increase of $400 million wasn’t near enough to make up the shortfall from the previous weekend. It would appear that people are simply spending less money… but it’s not so simple.

The Labor Department tracks prices on thousands of items, then adjusts them for changes in quality (even though there’s no real change at the register for consumers, but that’s a story for a different time).

A better measure is a basket of gifts that the Wall Street Journal put together, which included no adjustments. The basket dropped in price by 2.5% over the past year. So it could be that consumers are buying nearly the same amount of stuff, it just cost less.

Then there’s the huge story of Detroit and the smaller one concerning Illinois…

Detroit is bankrupt and just received a judge’s approval to proceed with debt restructuring, including a cut to benefits for current and future retirees.

Illinois is not technically bankrupt, but the state is $100 billion in the hole on its pension liabilities. The governor and state legislature just put forward a plan to reduce what they will pay retirees, what future retirees will accrue, and to require greater contributions from workers.

All of these actions are meant to lessen the liabilities that Detroit and Illinois carry, and fall into the category of debt reduction.

Putting the pieces together, there’s a long-term trend of flat or falling wages, slack demand, flat or falling spending, falling prices, and debt reduction.

The kicker in this story is that all of these things are happening while the Fed is printing $1 trillion per year. Who would have thought that could happen?

Deflation is a powerful force, and it’s happening all around us. At the moment, I see it almost every time I open a newspaper.

Rodney

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Ahead of the Curve

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Rather than relying solely on government-supplied measures of inflation, I’ve long watched relative strength ratios to determine whether inflation or deflation is the dominant force du jour.

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Rodney Johnson
Rodney works closely with Harry to study the purchasing power of people as they move through predictable stages of life, how that purchasing power drives our economy and how readers can use this information to invest successfully in the markets. Each month Rodney Johnson works with Harry Dent to uncover the next profitable investment based on demographic and cyclical trends in their flagship newsletter Boom & Bust. 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. Along with Boom & Bust, Rodney is also the executive editor of our new service, Fortune Hunter and our Dent Cornerstone Portfolio.