Where Do We Go From Here?

Our economy remains stuck on a path of uncertainty: With unemployment hovering around 10 percent and foreclosures at all-time highs, consumers are afraid to spend and employers are wary of new hiring.

Meanwhile, some employees face wage cuts. USA Today reports union electricians in St. Louis took an 8.23 percent slice in their pay and benefits. Union officials insist that with one of every three out of work, there was little they could say or do about it.

“We are in the throes of a construction depression … We have catastrophic unemployment,” says Steve Schoemehl, business manager of International Brotherhood of Electrical Workers Local 1.

Such dramatic wage decreases are hinting at deflation – when prices and wages drop simultaneously. On the other hand, stagflation is when wages drop but prices increase. Inflation is, of course, when wages and prices increase.

The last time this country witnessed deflation was between 1931 and 1933 during the Great Depression, according to the U.S. Department of Labor. Prices prices fell at an average annual rate of more than 8 percent.

The Consumer Price Index (an inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation) fell three consecutive months by the end of June 2010, according to the U.S. Bureau of Labor Statistics.

“I think deflation is a very real threat (to our economy),” says Richard DeKaser, president of Woodley Park Research in Washington, D.C., where he oversees macroeconomic forecasting, real time economic analysis, and housing valuation research.

On the flip side, some believe we’re in the clutches of inflation. Our national debt jumped in the last 18 months with more money being printed to help sustain our ever-increasing debt-load with China, Japan and the United Kingdom, the major players.

David J. Lynch of USA Today reports falling prices, of course, can benefit consumers as long as the economy is growing and the declines are seen as temporary.

But if the declines are expected to continue indefinitely, consumers will postpone spending and businesses typically delay investments. As incomes shrink, mortgages and other debts become harder to repay. This is one of the reasons mortgage foreclosures are rising.

Many economists, including DeKaser, who anticipate continued modest price declines, say the risk of a truly crippling and prolonged deflationary period, remain low.

“I just don’t think it’s a problem,’’ says Michael Bordo, professor of economics and Director of the Center for Monetary and Financial History at Rutgers University in New Brunswick, N.J. “The economy is recovering.”

We at WMB agree, but the pace is nearly flat and probably will remain that way for the immediate future unless some an industrial breakthrough leads to a new pattern of growth.

Generally speaking, as the economy continues to recover, demand for goods and services will increase and prices will likely continue to rise. Many financial experts agree that even if our economy reverts to another recession, and prices drop, the Federal Reserve would most likely intervene.

Even though the Fed’s current lending rate is already near zero, the Central Bank could use other tools to help stimulate the economy.

For example, the Fed could announce it would keep interest rates around zero for a specified period. It also could set specified ceilings for the yields on T-bills and other government bonds. This could be enforced by the Fed buying unlimited government debt, even if it means printing more money.

Whatever the case, we at WMB believe the ultimate solution to our sagging economy is to cultivate wealth by creating jobs through incentive programs.

Stimulating academia and industry to create new technology is one way this can be accomplished. Breakthroughs in such areas as energy creation or computing could lead us out of our current financial crisis.

This post is from TechMan, WMB co-author who blogs about trends, issues and ideas affecting business, industry, technology and consumers.