We all talk about it and express our concern about it. We all know something about it, some of us more than others. But my suspicion is that…for the most part…most of us have a limited knowledge of what it means when we say the words the economy. Unless we have studied economics or spent years in the field, the economy is one of those 800 pound gorillas living in our living room and escaping accurate definition.
I consider myself a pretty well-read person, and I like to think that I am intelligent about issues that affect our nation. I have a basic understanding of the economic issues facing us, but I am also aware that when it comes to being really clear about the economic crisis in which we find ourselves my knowledge is limited. For instance, I just read a fascinating and seemingly important article which appeared originally in the New York Times written by Sewell Chan. It is about the potential of deflation and the warning signs that have caused some economists to call for a shift in economic policy. I was more than half-way through the article when it became clear to me that I needed to back up and check my understanding of inflation and deflation. Both are such common terms that I’m afraid I’ve lost the thread of meaning that I need to fully understand the article.
- Inflation: The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. As inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year.
- Deflation: A decrease in prices, often stated as an increase in the value of money, related to a decline in spending by consumers. *
The concepts are simple, but the more global impact of these two factors becomes complex. Each of them, it turns out, can be problematic for the economy of the country.
- If inflation soars, the spending capabilities of the consumer becomes limited, fewer purchases are made, and the need to produce those products fails. When the purchasing power of the consumer decreases, companies pull back and unemployment increases.
- If deflation escalates, the value of the dollar has resulted in a slow down in spending. Fear and caution reign in the spending habits of the consumer. While interest rates and economic benefits may be beneficial to the consumer, spending is the dominant factor. (Currently, while interest rates and benefits are attractive, the banks are being overly-cautious and not releasing money sufficiently to trip spending.)
In both cases, the true value of the dollar is warped and industry and the consumers may find themselves in different places of understanding. The result is economic confusion. Confusion brings about lack of confidence. Lack of confidence causes the withholding of lending on the part of banks, and a pull-back on purchasing on Wall Street, and the trickle-down results bring about problems for the consumer.
I am being grossly over-simplistic in what I have just written. It is far more complex than this. But it serves to point out the danger we face by not being curious about the workings of the economy. When it gets complicated the tendency for many of us is to withdraw and assume that people who undertand the economy will act on our behalf with wisdom and generosity. That turns out to be a flaw in our thinking, as we have experienced over the past couple of years.
The solution, it would seem to me, is for the public to demand clarity in the reporting of economic issues by the companies and the media. Just as Congress has just demanded that the insurance industry must simplify its contracting language, so the financial industry must be clearer and respect the vulnerability of the public in economic matters.
Graphic Credit: http://ocw.usu.edu/economics
*(Both definitions: www.dictionary.com)
