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December 2017
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Which is it- inflation or deflation?
Garry Bartecki
Garry Bartecki

The world economy is in one big mess.  “The economy is getting better.”  Is what we keep hearing but for who? The only ones I see it better for are the banks and institutions who have all the QE funds and are investing them in the market because they can’t find a better yield. 

The Fed is determined to stimulate inflation and seems to be doing a good job of making dollars’ worth less every day of the week. For them deflation is a killer because it makes our debt worth more while the asset base is shrinking.  The Fed wants to pay all this debt the US is running up using cheaper dollars by printing more money. I guess it works for them, but for us holding on to our cash to cover day-to-day necessities, the number of dollars we have left over every week gets smaller and smaller.

There is no doubt the world is still working itself out of the 2007 depression caused by the credit bubble. People have to refinance or pay off debts. They have to sell assets to repay debt.  When you have an excess of sellers needing to sell, prices fall and deflation becomes the word of the day. In addition, people in this position don’t have excess cash to spend until after they get resettled, with many unable to find jobs at their prior income levels.

So here we are with the Fed doing all it can to stimulate inflation without getting any meaningful improvement in the economy or consumer spending. So what is going to happen? Inflation or deflation …which will it be?

I presented this five thousand foot review of our economic situation because it impacts your planning for business purposes as much as it does your personal planning. You can tell what I am talking about by listening to how public companies are acting. Many public companies are hoarding cash, using cash to buy back shares, pay dividends but not invest in the business. So instead of building the business they are financially engineering the business to reflect better returns for investors.

In an inflationary period you are pressed to use your funds sooner before price increases change the economics of the transactions. An additional benefit comes into play because hard assets increase in value during inflationary periods.

On the other hand, if you think deflation is here to stay you hoard the dollars because you will get more for your money because prices get depressed.

Me, I am leaning towards the inflation side of the coin, but when that will be in terms of the overall trend in the economy I can’t predict. It may come out where we have both, inflation and deflation, depending who you are and what you do. Where do you stand? Where does the Material handling industry stand in all this?  Are you growing the business or still in a wait and see mode?  This issue should lead to some interesting planning meetings.

We have talked about manufacturing jobs in the past and as far as manufacturing goes we keep hearing about the loss of manufacturing jobs and why we need to bring them back to generate middle class jobs. Unfortunately, the results we are expecting may fall far short of what is anticipated. As it turns out manufacturing went from 20% of GDP to 12% of GDP. That decrease, however, just didn’t reflect loss of manufacturing jobs but the growth of GDP in other areas. It is correct that at one time 30% of the workforce worked in manufacturing but that since has fallen to 10% because manufacturing jobs were lost, and productivity increased. In fact, a chart reflecting manufacturing for the last 20 years shows a steady increase in manufacturing reaching $2,000 billion in 2013. Of course there was a dip in 2008 and so on but it has come back significantly. What hasn’t come back, however, are the jobs that go with it. While there has been a 25% increase in manufacturing between 2003 and 2013, manufacturing jobs only increase by 5% because firms are doing more with less.

Bottom line here is we cannot rely on re-shored manufacturing work to generate a meaningful number of middle class jobs.

I guess the point here is we have to figure out where our companies are heading in this wild and crazy economy we live in. Should you invest to grow? Should you find new markets to attack that will keep you in the manufacturing plants and warehouses?  Should you use your rental expertise to expand into the construction side of business? Maybe expand into servicing their automated processes?

It is “risk on” regarding 2015. Which side of issue are you on….inflation or continued deflation? 

Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail to contact Garry.