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Wikepedia defines “deflation” as:

In economics, deflation is a decrease in the general price level of goods and services.^[1] Deflation occurs when the annual inflation rate falls below zero percent (a negative inflation rate), resulting in an increase in the real value of money – allowing one to buy more goods with the same amount of money. As inflation reduces the real value of money over time, conversely, deflation increases the real value of money – the functional currency (and monetary unit of account) in a national or regional economy.

Currently, mainstream economists generally believe that deflation is a problem in a modern economy because of the danger of a deflationary spiral (explained below).^[3] Deflation is correlated with recessions including the Great Depression, asbanks defaulted on depositors. Additionally, deflation may cause the economy to enter the liquidity trap. However, historically not all episodes of deflation correspond with periods of poor economic growth.^[4]

As of late it seems like the word “deflation” is being used daily by even the most trusted economists. At first it seems harmless to think everything we buy tomorrow will be cheaper than last year. If we listen to the most talked about subjects for the last couple of years like housing, cars, appliances etc., everything is priced at a discount. Housing is down by more than 25%, supermarkets have slashed the base prices of most items, and almost every car dealership is currently offering 0% financing in some way.

Why is all of this so dangerous? Well, it really boils down to jobs. With unemployment already at one of the worst levels in history, corporations have gotten used to manufacturing products with skeleton crews. In some ways that is good because as an economy we are manufacturing products more efficiently. Unfortunately, that also means that thousands of products are now being manufactured abroad. Lets use Dell as an example. The number one manufacturer of PCs sold in the US. If you order any Dell product chances are that your computer is coming from Malaysia. If you call Dell’s customer support, chances are that you will be connected to some call center in India. Thousands of American jobs farmed overseas due to lower wages. Furthermore, the sentiment of the American consumer is, why would they want to buy anything today when in a couple of months they can get it for half the price? Or, why would I want to buy a house when chances are that interest rates for mortgages will be in the high 3′s%? This type of hesitation represents a tremendous blow to the economy because everything goes stagnant. The wait means factories not able to move inventories produced, construction remaining at a stand still and more jobs being cut. A chain reaction that our economy can’t afford at these already anemic levels.

So what is the answer or our way out? The answer is simpler than one might think. As per the Census Bureau, 3 out of 4 jobs in the US are created by the small to medium size business. Currently, there are n0 tax incentives from the current administration for this sector to hire workers. Additionally, the finance committee just spent months crafting the reform that essentially precludes businesses from obtaining loans to spur more research and development and job growth. Imagine the possibilities of a Dell Computers bringing those thousands of jobs back into the US. Or the normalization of the housing market, the single biggest factor for growth. Any of these possibilities are better than the 1940′s alternative out of the great depression of turning empty factories into weapon building assembly lines. Every American has the duty to write to our current leaders and elect a forward thinking individual in the upcoming local elections. Regardless of your party affiliation.