HOW TO PROFIT FROM FALLING PRICES & DEFLATION ©

Glenn Hautly, Email: ghautly@pacbell.net, Tel: 408.973.9477

It was Bernard Baruch, the financial advisor to seven presidents who said, “Financial success is looking into the future and doing something about it before it happens.”
IT IS BETTER TO BE SAFE AND WRONG THAN BE AT RISK AND WRONG
From: The Great Reckoning – Davidson and Lord Rees-Mogg; “Facts become economically irrelevant if they do not fit comfortably into our existing worldview or paradigm and will generally be misinterpreted or ignored.” and Richard Bach “The worst lies are the lies we tell ourselves. We live in denial of what we do, even what we think. We do this because we're afraid…”
The Wind Beneath the Economy's Wings From: by John Mauldin - March 17, 2006; John@FrontLineThoughts.com. Former Goldman Sachs investment banker John Talbot says in his new book, "Sell Now! The End of the Housing Bubble," that many Americans could be facing a 50% decline in housing prices. He estimates that America's top 40 cities will see an average 47.2% decline: Boston is 49.4%, Miami 44.8%, New York 44.6%, and Chicago 27.3%. He suggests that in the space of five years. Alan Greenspan's cheap-money policies have added $30 trillion to housing prices worldwide, an unsustainable 75% increase, he says.

The current cycle is more social than economic and its raw materials and/or resources are creating the major shift in confidence back to private enterprise and away from government. Money is power but now the engine of current wealth creation is now “commerce and information” not government and territorial conquest. In the words of Martel – “Information is rapidly replacing energy as society’s transforming resource.” Information and technology is reducing the power of government, particularly due to e-commerce, globalization, cryptography all of which reduce tax collection.

All of the above is important especially in light of the statements: From: http://www.mises.org/fullstory.asp?control=1298 . “What wipes out wealth and profits and makes debt repayment more difficult is monetary contraction not falling prices. There is a reduction in the quantity of money or “wealth” existing in the economy. Wealth and debt including mortgages fall in value or become worthless due to default, foreclosure, bankruptcy, wage cuts, movement of cash off-shore, government seizure, fraud and/or disappearance of money etc. This perspective by Dr. Ludwig Von Mises is correct and hits at the heart of what to prepare for. The following tells us the Federal Reserve does little to help us understand and prepare for the impact of deflation. Be aware that wide spread falling prices results in U.S. dollars buying more resulting in deflation not inflation.
Federal Reserve Chairman Bernanke tells us; “The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending, government tax receipts etc.--namely, recession, rising unemployment, and financial stress.”

From CEE article: Monetary Policy, by James Tobin. “Experience, certainly in the Great Depression and also in subsequent recessions, indicates that downward adjustments of wages and prices cannot avoid damage to output and employment. Moreover, wage and price cuts may actually reduce demand from buyers delaying purchases in expectation of a further price declines.”

Please refer to the Board of Governors of the Federal Reserve System example of the fruitless efforts of the Central Banks to stop Deflation in the article by the: International Finance Discussion Papers Number 729 June 2002 (62 pages). Preventing Deflation: Lessons from Japan’s Experience in the 1990s, see: http://www.federalreserve.gov/pubs/ifdp/2002/729/ifdp729.pdf

August 26, 2002 Bruce Steinberg, Merrill Lynch Chief Economist, made the following
comments about the economy: "Deflation has powerful negative economic consequences. First, it increases the real value of debt; household, corporate, government, impairing the ability to spend or invest. Second, as prices fall and cash gains in value over time, consumers have an incentive to postpone purchases. Most important, deflation renders monetary policy potentially ineffective.”