Sadly, it also guarantees profits and wages go along for the ride. First, falling prices are not cool, unless you’re an old retired snort on fixed-income government dole. But even so, it’s unlikely you’ll be buying big-ticket items with declining pricetags, as opposed to food and crap from Managed fund definition investopedia forex. So, this is still not a good gig.
Falling prices, as with houses now in Calgary, make reasonable people delay their buying decisions. Consumer spending goes down, and the economy along with it. Canadian GDP is based on consumers, and almost a quarter is directly tied to residential real estate. Second, when people spend less, businesses make less. They cut back on their own spending.
Or they tell people their wages and salaries will be decreased, as is now happening in the oil patch. Or they make employees become contractors, without benefits. Third, when prices fall so do profits. Look at the banks, several of which were downgraded this week by analysts who understand what lower mortgage rates and less consumer spending means. So they have to cut overhead.
Like CIBC, which trashed its IT department and punted 500 employees. As a result, and the fourth component of deflation, employment falls and consumer spending follows. We’re living this now, as you saw this week with a revision of Stats Canada numbers showing job losses in December were three times worse, and our track record for all of 2014 was piteous. Now with the oil contagion spreading, things will only deteriorate. I would hate to be selling truck nutz in Alberta these days. Actually I’d hate it any day.
As profits, incomes, jobs and prices fall, money gets more valuable, which means debts are harder to pay. People on your street have never owed as much. And yet, the sheeple do not learn, as evidenced from new bidding wars in Vancouver and some parts of Toronto in the wake of the Bank of Canada’s regrettable little nip in interest rates. As you might expect, this is being egged on by a voracious and irresponsible real estate industry. Few people alive today have any real experience in fighting deflation. So far central bankers have printed money, flooded economies with liquidity, supported banks, eased credit restrictions, paid people to buy cars and build decks and slashed interest rates. Governments have gone deeply into debt running deficits so they can keep social spending high even as tax revenues crater.