The case for deflation just keeps getting stronger

(A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a satirical look at marketing and business.)

Last weekend saw Office Depot & KBToys join the ranks of Circuit City, Linens ‘n Things  and Mervyn’s and other bankrupt retailers. The rush of companies liquidating their inventory after going out of business is adding more deflationary pressure on the economy. As FinancialArmageddon notes:

One of the feature that defines a deflationary downturn is the expanding array of sellers. You don’t just have the usual crowd who are looking to make a profit or to get rid of something they already own so they can buy something else. You also see more and more individuals and firms who have to sell because they don’t have enough cash on hand to meet their needs; lenders who end up with something they don’t want because borrowers have defaulted on their obligations; people who are worried about their job prospects or other concerns who want to be more liquid; and others who simply get caught up in the spirit of the times.

This all spurs a hesitation to buy things among companies and individuals as they wait and see if prices will get even cheaper. (This headline from the BBC – US inflation falls still further — begs the question, how far does inflation have to fall before the press is willing to call it something else?)

I suspect we will see a similar thing soon in mortgage refinancing. As the prime drops ever lower, people are going to wait to see how low an interest rate they can get. For those thinking the prime being at 1% can only get a little lower — well let’s hope so. The once unimaginable case of the prime going negative — that is paying institutions to borrow money in the hopes that they will lend it to others — is now far less unimaginable. (I’m not holding my breath on this, I’m just suggesting that the idea is no longer totally impossible.)

Sadly for me and other consumers, our loan rates probably won’t go down. According to Bankrate.com, the national average rate for a 48-month new-car loan stood Monday at 6.8 percent, and 7.07 percent for a 36-month used-car loan. As Kevin Hall writes:

What those numbers mean for consumers is this: Banks are willing to lend only at a premium, even after the Bush administration’s $700 billion Wall Street rescue plan directed billions to banks in a bid to spark the economy through new lending. That means the plan isn’t working.

Thank you, Kevin.

Also average humans like us aren’t getting much when we loan our money to institutions: Current highest 1 year CD rate is around 3.7%.  Suddenly muni bonds — AAA insured 10 year — at 4.2% look like a great idea. Maybe not as safe as T-bills, but not bad and a lot better return ( 10 year T-bills are currently going for 2.49%, a number I expect to drop into the negatives). And if these suckers go under the system is so screwed that T-bills won’t help either.

Last 3 posts by Constantine von Hoffman

• Housing prices sink as underwater number rises - August 11th, 2009
• The home price increase that isn’t - July 28th, 2009
• Why the increase in housing starts means trouble - July 21st, 2009

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Tagged as: bankruptcy, deflation, fed, Mortgages