Deflation Isn't Good Either

Lower Demand Means Lower Prices
The weak economy is marked by unemployment, pay cuts, and investment losses. In other words, people have less money to spend. In response, your favorite stores are cutting prices to try to get you back into their stores.

Waste Some Money
So, if you have some extra cash, things are looking cheap. In fact, if you can, you should waste some money. This economy was largely built on wasting money. Even worse, a lot of that wasted money was borrowed money. The very reason why the economy is struggling right now is because we stopped wasting money.

Think about how many people havejob titles like Ford Excursion assembly line worker, Starbucks barista, Bose soundsystem engineer, Tempurpedic mattress salesperson, subprime mortgage broker, Super Sweet Sixteen party planner, and foie gras goose forcefeeder. They all offer crap that we want, but don't need. Demand for these things are falling, so now they're cheaper.

Stuff We Need
But it's not just discretionary items. Food and gas prices are also falling. Again, this has much to do with falling demand, which is sad when you think about it.

Before You Offend a Poor Person...
If you are able to buy these cheaper goods, you are part of the fortunate minority. These lower prices are still expensive for most people who are struggling to make mortgage payments, car payments, student loan payments, utility bill payments, and credit card payments.

The deteriorating demand coming from these people is the major reason why prices are falling.

Business Perspective
Of course, lower prices puts pressure on corporate profit margins. Fortunately, demand for goods is so low, that raw material and production costs are coming down. This is reflected in oil prices, which are down 60% from July highs ($147.27/barrel on July 11. $56.88 right now). Food, metals, plastics, paper, and other commodities have also seen sharp price declines.

The Problem of Deflation
As prices down, company revenue goes down. Lower costs may keep profit margins somewhat intact. Nevertheless, if revenue falls, absolute profits fall. This is bad for stock investors.

To fight falling profits, employees will get paid less or get laid off. What happens next? Just go back to the top of this post.