One of the few bright spots of the economy is that Fed Chairman Ben Bernanke can stop worrying about inflation.
For years, “job one” for Fed Chairmen has been to keep inflation in check. During the past couple of decades, inflation has been very tame, ranging from two to three percent.
We’ve had it so good for so long, we tend to forget the “stagflation” of the early 1980s when both inflation and unemployment were on the rise. When Ronald Reagan took office, inflation was soaring at nearly 15 percent annually.
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It was an ugly time in our financial history.
Relatively low inflation led to lower interest rates which in turn created a “new prosperity.” These low interest rates discouraged personal savings and prompted retail investors to pull their money out of money markets to seek greater returns in the stock market.
And Now Cheering News
These conditions created the tech boom, and later the real estate boom, which now is being blamed for the malaise that has beset our economy.
So what’s the good news?
It could be much, much worse.
Unlike the wrenching recession that gripped our economy from the late 1970s into the early ‘80s, the costs of goods and commodities across-the-board have become more affordable. Everything from food to fuel has become cheaper.
Prices paid to U.S. producers plunged 2.8 percent in October, the most on record as the faltering global economy caused demand for commodities to dry up. At the same time, as the dollar has strengthened against most of the world’s major currencies, American consumer buying power has actually increased.
It’s true that we have less to spend. But the impact of falling commodities prices has also meant that our consumer dollars can be stretched farther.
There is no question that flagging consumer confidence will put a damper on retail sales this Christmas. The fallout from the financial crisis is also walloping the people on Wall Street who created it, and many who didn't.
Citi Thinning Out
Yesterday, Citigroup Inc. revealed plans to lay off more than 50,000 from the financial giant's payroll in a bid to drastically reduce expenses and rebound from billions of dollars in losses brought about by the housing-market collapse and weakening economy.
In a further sign of the times, Goldman Sachs Group Inc. said its top executives would forgo annual bonuses, intensifying the pressure on other Wall Street chieftains to follow suit.
Even though this financial earthquake has significantly eroded the wealth of everyday Americans, when the shaking stops, we just might be in a better position to survive and recover than we have been following similar financial crises.
The chief factor in our ability to recover this time may be the relatively low levels of inflation combined with the apparent resilience of the U.S. dollar.
Thank goodness for small favors.
John Cohn is a senior partner at Globe West Financial Group, based on the Westside. www.globewestfinancial.com
