By TED LUX
Are prices going to come down on just about everything we buy and consume in our country and Los Angeles? Is it conceivable America will be engaged in a protracted period of deflation? There are signs in our economy that certainly point to that possibility.
Over the last nine months or so, gas prices have tumbled locally from more than $4.50 a gallon to about $2.25. That’s more than a whopping 50 percent decline! Demand has greatly diminished, not only for gasoline, but for many other products and services as the worldwide recession has taken hold. Look around today and you’ll see a lot less foot traffic at malls and shopping centers. Restaurants are starving for patrons. Happy hours and early bird specials are being extended to 8 p.m. all over town to attract business. Ticket prices to sporting events (like the Angels and Dodgers), which are traditionally raised year after year, have held firm in 2009. National retail chains and local mom-and-pop stores are shutting down in Los Angeles and across America. “Clearance” signs are posted prominently at shopping centers, malls and along Main Street U.S.A. We’ve recently said good-bye to national retailers Circuit City and Mervyns. Just last month, General Growth Properties, the second largest shopping mall owner in the country, declared bankruptcy. That’s just got to mean many more tenants are suffering, going out of business and not paying rent.
Additionally, the credit and mortgage markets have stalled or, worse, frozen up. Banks have tightened lending practices significantly and money is “standing still” dollars aren’t changing hands. Home values have tumbled nationally and in Los Angeles. For-sale signs dot our green landscape. To say that the real estate market is somewhat soft is misleading. It’s much worse than that. I should know. I’ve been in the real estate financing industry more than 20 years. Equity in homes for millions of families has evaporated into thin air. Equity in our stock and retirement plans has also crumbled; the market is now down 40 percent from its all-time high reached in October 2007. General Electric Co. stock, once selling for more than $50 a share, is on sale at just $12. Many stock professionals over the years have said, “As GE goes, so goes the United States.” Well, if that’s the case, then GE’s collapse is certainly an indication of our country’s dire economic condition.
Unemployment, wages
Unemployment is now more than 8 percent nationally (and at about 11 percent in California) and is expected to worsen in 2009.
Wages should drift lower or at least stall as a glut of workers competes for job openings. Pretty soon you’ll see a very skilled and trained work force in professions hard hit by the recession taking on new roles where their skill set is inconsequential. Look for bankers, brokers and investment advisers taking jobs in fast food, urban cookeries and kitchens across America.
The demand for goods and services has declined and with it we are seeing signs of deflation. Prices are not coming down because of vast increases in supply of new widgets to meet demand. Prices are declining because consumer spending and demand has greatly diminished and inventories have built up.
We’re now in a deep recession. The worst one ever experienced by a majority of Americans. Most of us weren’t around to witness the Great Depression. A deep and protracted decade of deflation would not be a good thing for our country and Los Angeles. At some point, the “eggheads” would officially declare our country in depression. The Obama administration knows this and they are attacking the vicious downward cycle head-on. But will the government’s efforts truly combat matters?
Today, lower prices spur short-term spending and consumption. That’s why some of us are enjoying late-night happy hours. But eventually people could collectively wise up and say, “Honey, I’m not going to the mall today to buy anything. The sales will be even greater next week. Let’s just stay home and watch TV. Everything will be cheaper tomorrow.”
Consumers across America will therefore hold dollars in expectation that prices will be lower in the future. And as our national consumption and spending stalls, our economic crisis will tailspin into another level of despair. Will future generations look back 100 years from now and call the period of 2008-18 America’s second “Great Depression”?
Imagine in several years a quarter-pounder with cheese selling for 75 cents or movie tickets for the Saturday night show selling for $5.50. Can you envision being able to buy a new Mercedes for less than $20,000 or a beautiful two-bedroom home in Los Angeles for less than $300,000? In a long and protracted period of deflation it’s certainly a possibility. And if we take note and look around us, that path could easily be down the cobblestone road at the next corner.
Ted Lux has been involved in real estate lending in the Los Angeles area over 20 years, and wrote the investment book “Exposing the Wheel Spin on Wall Street.”
