01-01 Deflation

My grandfather said there was a lot he did not understand because he did not have an “edumacation”. Well. I have been a student and an educator all my life. And the more I learn the more I know I do not know. Economics is one of those worlds of mystery, where people like to pretend they understand what is going on.
Are we heading into a period of deflation? Scary if we are. Apparently when we are in a period of inflation, that is when prices are rising, governments and central banks know what to do. They increase interest rates. But when prices are declining, what to do is not that obvious or that simple. Deflation is hard to fix.
I learned a lot about deflation from the stories my father told me. He was a victim of the Great Depression. He worked on a farm outside Regina in 1928, to pay for his passage from Belfast. The farmers of the West needed workers.
But it was a year when there was insufficient rain. A year later his farm family was in deep trouble. It started with a drought that devastated the Saskatchewan farm land. Then farm commodity prices started to decline.
Canada went into a period of deep depression and deflation. Around 25% of the workforce was unemployed. And why it is referred to as the Great Depression is that the decline in prices, the contraction of the global economy and the massive levels of hardship lasted for a period of about ten years.
The farm in Regina, that employed my father, went into bankruptcy. Farm prices collapsed, but the mortgage payments stayed the same. That is why in a period of deflation, debt relative to income increases. And that is why so many business and home owners lose everything.
Even today, following the pandemic, and despite government efforts, Canadian banks are preparing for massive levels of business and personal bankruptcies, and massive levels of bad debts.
The Great Depression impacted my father’s life. He became frugal and kept strong cash reserves all his life. And over the years, he often blessed Eaton’s for never laying him off during the Depression. When I was born in 1933, and my mother could not work, my folks lived on starvation wages.
Nevertheless, my mother always saved dinner scraps for the men knocking on our door and asking for food. The hardship of men starving were stories that were unbelievable unless they came first hand.
Today, following the pandemic, Governments and central banks everywhere are trying to keep the economy from deflating. Central banks are printing money and governments are backstopping jobs with massive public funding.
But they do not know how many firms will not reopen their doors despite their best efforts. And they do not know at what pace consumer spending will pick up again. Listening to the news, is a serious “bullshit baffles brains” exercise.
In some cases, governments will nationalize large firms rather than see them collapse. Or they will take an equity position to give large firms an infusion of capital. And governments everywhere are helping small businesses stay afloat.
It will be a time of surprises and public experimentation. Politicians are not really sure which approaches will work to prevent deflation.
But they will bloody well die trying. Live or die politically that is. In my opinion, most of them deserve an “A” for effort.