Isn't the deflation of the U.S. housing bubble driving up the market prices of rents, and the rate of inflation?
Seth Date: Tue, 27 Jun 2006 23:40:54 -0700 From: Sabri Oncu <[EMAIL PROTECTED]> Subject: The Real Flation Threat Friends, What is your take on what is below? Best, Sabri +++++++++++++++ The Real Flation Threat Deflation, not inflation, is what Ben Bernanke should be worried about. By Robert B. Reich Web Exclusive: 06.22.06 Each generation responds to its own traumatic memory. Ben Bernanke and his Federal Reserve remember the double-digit inflation of the 1970s and are determined to mount a preemptive strike. Thats why theyre poised on raising interest rates yet again. Bernanke and company have no direct memory of the trauma that haunted the previous generation, the depression of the 1930s. Each generation, in its determination to avoid the nightmare it does remember, runs the danger of over-reacting, and thereby bringing on the opposite trauma. A generation ago, economic policy makers paid too little attention to inflationary forces then building in the American economy. Eventually, Paul Volcker had to break the back of inflation by raising interest rates sky high. That put the economy into a severe recession. Now Bernanke and company are paying too little attention to deflationary forces building in America and the global economy. Bernanke fears that todays economy resembles the one that began to overheat the 1970s. But hes wrong. Labor unions today dont have nearly the power they did then to get wage increases. Big companies dont have nearly the power they did then to raise prices. Global wage competition is keeping a lid on American wages, just as global price competition is pushing down on American prices. Meanwhile, fancy computer software is allowing rivals all over the map to erode almost anyones market share. Whos going to raise prices in this environment? Whats more, theres no reason to raise prices. Productivity has been soaring over the last five years while the median wage has been stuck in the mud. Wages, remember, constitute about 70 percent of the cost of doing business. So how can price pressures be building? Bernanke and company worry the U.S. labor market is heating up. Theyre wrong here, too. Despite what look like rosy employment numbers, a smaller proportion of the American labor force is employed today than it was in 2000. Millions of people dont show up on the unemployment rolls because theyre too discouraged even to look for work. The price increases were now witnessing are not due to excess demand over limited productive capacity, which causes inflation. They come mainly from soaring prices for energy and raw materials. These commodities are being bid upward because of Chinas rapid growth, but take a closer look and you see something else going on. Much of the increase in commodity prices is being driven by speculators who expect prices to continue to rise. In other words, part of what were seeing are speculative bubbles. Such bubbles can burst any time. The fact is, the global market is glutted with productive capacity, and thats not chiefly because of the huge gains in American productivity. If you really want to see a glut, take a look at China. If anything, theres too much capacity relative to demand. This is a recipe for deflation. Prices can begin to drop because buyers hold off, expecting further price decreases. It happened in Japan in the 1990s. Its already starting to happen in certain housing markets in the United States that had been red-hot but are now cooling so fast home prices are dropping. Deflation is often accompanied by stagnant or falling wages, which make it harder for consumers to afford to buy. Look whats been happening to American wages. The Fed and other central bankers around the world are raising interest rates because theyre fighting the last war. But they already won that war. Inflation is no longer our biggest threat. They ought to be worried about the war before the last one, and the specter of deflation. Theyre in danger of losing that war even before they know they're in it. Robert B. Reich is co-founder of The American Prospect. A version of this column originally appeared on Marketplace. http://www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=11676 ------------------------------
