Consumer spending can soothe economy
Nathan Balke, an economics professor at SMU, says a recession can create declines in consumer and wholesale prices for short periods of time, but it's “very unlikely” it would lead to deflation.
By Heather Draper
It's hip to be cheap these days.
Marketers for CheapTickets.com have even coined a phrase for Americans living in this new era of consumerism — “the age of the Cheaponomy.”
“Cheaponomy ... describes the ways in which many Americans are managing with the tightened U.S. economy,” according to a statement from CheapTickets.com. “The term describes an economic cycle in which consumers are embracing lifestyle changes to live ‘on the cheap.'”
Most people I know are keeping a close eye on their spending. The economic meltdown has dampened Americans' rampant consumerism. We're buying less and cutting up our credit cards.
The bullish part of me — the part that always has hated and avoided debt — thinks this is fantastic and long overdue.
But the bear in me worries that the sudden contraction brings with it the prospect of deflation, or an extended decline in prices of good and services (even though I'm enjoying lower gasoline prices as much as everyone else). . .
Nathan Balke, economics professor at Southern Methodist University in Dallas, said a recession can create declines in consumer and wholesale prices for short periods of time, but it's “very unlikely” it would lead to deflation.
“In the United States, we have not had a substantial bout of deflation since the 1930s,” Balke said. “Basically, the Fed would have to allow it to happen. It's not a possibility for the Fed to allow ongoing deflation.”
Balke, a Dedman Family Distinguished Professor at SMU, said deflation would mean that the Fed allowed the growth rate in the U.S. money supply to contract, and “that is very unlikely.”
On the consumer side, San Antonio's Nivin said the uncertainty in global markets has people temporarily afraid to spend money.
“People don't know what's going on, and people are pulling back and waiting,” he said. “Once the financial markets settle down, that will help a lot.”
Perhaps the moral of the story is this: It's fashionable to be cheap during a recession, but nottoo cheap.