Deflationary cloud’s silver lining

by Ed Zwirn
Originally published in the NY Post – July 11, 2010. Read the original article here…

While most economists agree that deflation is usually no cause for celebration, given its status as a bellwether of decreasing demand, there are “silver lining” aspects to the phenomenon.

“It’s good news and bad news,” says Chris Whalen of Institutional Risk Analytics. “The winners will be those who have little or no debt and cash and are able to discern between good and bad investments.”

Despite economists’ fears of deflation, price reductions on consumer-staple products could help stretch the paychecks of cash-strapped Americans and allow them to pay down some debt.

Beth Ann Bovino, senior economist at Standard & Poor’s, argues that “good deflation, if there is such a thing, would need to come from productivity gains.” While productivity “has increased to some extent,” most of this “has come about because of cost cutting,” as fewer workers face continued pressure to produce, and not due to improvements in technology. Deflation could actually help the economy, she argues, assuming “the recovery is in place and productivity is what’s driving lower prices.”

The downside to this scenario can be viewed by looking at the Japanese experience, which caused an entire population to commence hoarding, she says. “In a deflationary cycle, if prices are going to fall next week why buy anything this week?”

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Ed Zwirn

About Ed Zwirn

Ed Zwirn is a journalist/editorial professional with a focus on financial trends and practices. He lives out in the woods in Bethel, NY, not far from where the Woodstock Music and Arts Festival was held in 1969. As a financial writer, his work has appeared in The Wall Street Journal, The New York Post, CFO Magazine and news services including Dow Jones Newswires and Informa Global Markets. Ed also spent three years in Ukraine, where he ran an English-language news service. He now divides his time between his freelance journalism, song and poetry writing, and barbequing and lawn-mowing on his 2.5 acre property.