As I watch the exuberance in Washington for our new president, I’m struck by just what he’s up against once he gets into the job. His speech will undoubtedly focus on service, which is good, because the problems we have right now will never get solved by him alone.
The text of the stimulus package bill moving through the Senate paints a pretty bleak picture that the media is not really letting us know about. We’re staring down the barrel of a huge unemployment problem whose scope is quite out of the discussion. Even with the stimulus package, the CBO researchers think we’re still looking at as much as a nine percent unemployment rate. Our last major recession in the Eighties was around 10.5%. Without the stimulus package, we’re probably looking at something on the order of about 13% unemployment, at least according to those same researchers.
And attendant with that unemployment is the looming possibility of deflation. If that’s the opposite of inflation, why is it bad? Well, it’s not exactly the opposite. Don’t you just love economics?
Inflation generally happens as a result of a weakening of the dollar. The dollar goes down, the relative price of goods and services goes up. It’s a monetary policy thing. But deflation doesn’t happen when the value of the dollar goes up, in fact the companies selling goods and services are quite happy to take the extra value of a raised dollar. Deflation happens because no one is buying anything. As a result, in order to move products, prices are dropped in sales and clearances. But those price drops become the way it is.