Confessions of a Former Inflationist

I recently received an Email from "RS", a long time member of the hyperinflation is coming crowd now but now sees things in a different light. Let's tune in and see what "RS" has to say.

Mish, I was a true believer in the "hyperinflation is coming" theory for quite some time. However, I have since changed my mind. Here’s why: I own a computer business and I used to pay techs $15-20/hr. I now have people willing to work for $8-$10/hr. While the nice guy inside is saying “pay people well” the businessman is saying “market conditions demand paying people what the market will support.”

Recently I have had to offer price discounts to obtain new business. Some contracts I picked up were for around 1/3 of my standard fees. I have cut costs to the point where they can be cut no further if I am to maintain my debt obligations. I am now at the point where my options are to work more hours for less money or “exploit” the labor market. Considering that I am already working 80-90 hour, there was no choice.

I just interviewed a single man nearing retirement age with a young daughter a couple years older than mine. He is not only willing, but trying to hide the fact that he’s DESPERATE to work for $8-10/hr. I might be able to afford to pay him $12/hr today, but with what’s coming over the horizon, wisdom dictates paying him $8 and using the difference to lessen debt obligations as quickly as possible. That would lower my costs for when the available business gets even tighter, leaving me in a stronger position to bid and win, and helping make sure he’ll still have a job in 12+ months.

As it seems to me, high debt load, plus rising product prices, plus deflation’s hit is painfully powerful. I’m confident from reading your articles that it’s only going to get worse.

RS

Thanks for sharing "RS". I am sure your story will help many see the light. Those fixated on the price of milk, eggs, and pork chops are missing the boat. There is enormous pressure on wages. Look at GM. Union power is dead. New GM workers will make half what those they replaced did.

I recently spoke of Massive Government and Private Sector Job Cuts. Every one of those people will be scrambling to find a job. Odds are most of them will gladly accept a pay cut to get work.

Fed Concerned Over Wage-Price Spiral

Ironically, Fed Governor Janet Yellen is concerned about a wage-price spiral.

The Fed "cannot and will not allow a wage-price spiral to develop," Yellen said today at a conference at the University of California-San Diego. The economy will "grow only modestly for the remainder of the year," while picking up in 2009.

I am wondering what planet Yellen is reporting from. Jobs Have Declined 6th Consecutive Months with 438,000 job losses so far. It takes 150,000 new jobs to break even with the birth rate and immigration. Unemployment is soaring, credit is collapsing, union bargaining power is nonexistent, and Strip Mall Vacancies Have Spiked to Levels Last Seen in 1995. Talk of economic expansion and concerns over wage-price spirals are complete silliness in this environment.

 

Comments

[kotika98:]

Here is how to read Yellen's comments. Its like, "yes we will fight the wage-price spiral if it comes, wink wink ('cauz we all know it wont)". Here is another way to read it - "yes, we will fight the wage-price spiral because there is nothing we can do about the commodity-cost spiral".

2008 Jul 10 09:15 AM

[Larry House:]

Very interesting piece. This is a little different take on inflation than the screaming headlines present. Man, this is a crazy economic time!!

2008 Jul 10 10:14 AM

[User 143167:]

There is no hyperinflation, but stagflation. The tame core inflation is a fool's gold. It only means this recession will be much longer as wages cannot keep pace with inflation which is driven by the global demand. This is even worse than wage-inflaiton spiral, I assure you.

2008 Jul 10 10:17 AM

[Jason Rines...:]

This is deflation let's all say this loud and clear and nice and slow. U.S. workers can expect flat wages, cutting of benefits and longer hours.

As a businessman, I can tell you that employees are just starting to figure out they know longer hold the cards but mentality takes time to change and meanwhile, we all must do what we all must do.

I'll make it easy for any business people reading this: Run your business toward profits. Period. Feeling bad and attempting to work harder for your employees behalf is a waste of time. Move closer to the money and this in itself costs time and money.

Your family and shareholders come first, then the extra goes to employees who perform. Lose the employees with the attitude of 'my employer owes me something', you can't fix ruined employess whom have little or no understanding of economics. You'll find this is a better way to go (giving more to productive employees and simply firing attitude employees) in the short-term as you add on lesser payscale personell. The productive employees know they earned there right to stay and prosper and the newbies will know they can earn there way up the corporate ladder. Just like the old days when we all understood fundamentals :)

2008 Jul 10 01:53 PM

[icandoitdon:]

User 143167 has it right.

this is the worst of both worlds....inflation in core necessities of life, deflation in wages and price competition on all the imported crap nobody needs. it's a prescription for trouble.

declining disposable personal income is not the savior of any business, large or small...it's death by a thousand cuts.

2008 Jul 10 04:49 PM

[CLH:]

Mike---I agree. I did think inflation was the problem. However, with wages dropping and housing crashing. We are in deflation. Same as the 1930s and Japan in the 1990s. We need to keep interest rates low and not raise them like the idiots in Europe who are raising rates while growth slows. Europeans are not known for their intelligence.

Commodities will soon crash (including oil).

2008 Jul 11 09:12 PM

[REBEL:]

All Americans need to get real: the US economy is crashing and the global economy will collapse, (probably within 6 months after the Beijing Olympics). The collateral damage will be awful and many US citizens will be glad to work for any wage they can get. The Fed's pathetic actions to support insolvent banks, insurance companies and totally unworthy borrowers by guaranteing their losses with taxpayer money will drag the economic pain for years.

2008 Jul 12 12:56 AM

[icandoitdon:]

housing was a bubble that got out of hand because of recklessly low interest rates, a lack of prudent lending standards, overleverage and thinly capitalized financial institutions unable to absorb the inevitable fallout of their own making. as a by-product, it is the financial system and our u.s. dollar that are crashing. housing is reverting to it's historic price norm in relation to income and affordability.

as for wages dropping, it is no coincidence that this trend emerged not only with increased competition from foreign sources but with "free trade" (it ain't free), an anti-union bias by both government and the private sector and a defacto policy of using illegal immigrants as a source of cheap labor. but i'll tell you who isn't suffering from wages dropping....the incompetent leadership of our major financial institutions that are at the heart of today's financial meltdown. or our complicit, ignorant and naieve government officials asleep at the switch who didn't believe in regulation but in the "invisible hand" of capitalism to keep our institutions on the straight and narrow. but what the hell....that's america. we have freedom to succeed and freedom to steal. what we don't have any more is freedom to fail. the cost of failure belongs to the taxpayers.

those "idiots in europe" have experienced the effects of worthless currencies before. they're smart enough to understand...unlike self-serving wall street and a clueless federal reserve...that the ultimate by-product of a currency that becomes worthless is inflation...not deflation.

"europeans are not known for their intelligence." that's a good one coming from the likes of a country that's exported it's worthless debt securities to virtually every financial center on the planet. i am an american too and i don't mind pointing out that the enemy is not europe...it's us.

2008 Jul 12 12:59 AM