Covering Up Inflation Through Product Quality Reductions by Gary North

1.  Read this article.
2.  There are questions at the end: answer them using complete sentences in a new post at your blog.
3.  Send me a copy of your blog so that you can receive credit for this assignment: no blog, no credit.

May 2, 2011

This was posted Saturday.

In his blog, Ferfal Aguirre talks about how cheap and shoddy the products have become in Argentina, since the economic collapse of 2001.  Well, I just happened to look at the cotton content of the Hanes socks I just bought, women's crew socks... 72% cotton.  I have the exact same type of socks in my closet still in a package. The cotton content is 75%.  So as cotton goes up (170% or something) the content goes down, the end product is made with cheaper products.

What Aguirre describes is a variation of the old Soviet-era saying: "The government pretends to pay us, and we pretend to work." The Prophet Isaiah described it in 760 B.C. "Thy silver has become dross (useless), thy wine mixed with water" (Isa. 1:22). The money was debased; so were the products.  
This is today affecting packaged food.  The number of ounces inside packages is reduced. Food prices are moving up so fast that this is the marketer's strategy.
 
The opposite is true of most electronics. Product quality improvements are extraordinary. They more than offset the slight increase in prices in the general economy.
 
In my field, quality improvements have been spectacular. I do everything cheaper and more efficiently than I did in 1980. Yes, I use 1984 keyboards, but that's my preference. I got used to the feel they have. But what they plug into today is fabulous. Hardware is vastly cheaper. Software is vastly cheaper. There are few $495 programs these days; all are highly specialized. WordPerfect for DOS cost $495 in 1982, or close to $1,150 in today's money. It held that price for a decade. You can WP X5 for under $75 today. You can get Writer in OpenOffice for free.
 
Some asset classes are more expensive; others are cheaper. This is why it Proxy-Connection: keep-alive
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so difficult to calculate price changes in general. I think the median CPI is close enough. I can see the trend of prices. These days, the trend is rising slightly, but we are nowhere near double-digit rate increases. There is price inflation, but it is less than it was as recently as 2005.
 
So, some goods are showing signs of quality reductions.
 
Because gasoline cannot be tampered with, it reveals a high rate of increases as oil rises in price. But this is not the same as price inflation. This is a product increase. It will force reductions in spending elsewhere in the family/corporate budget. UPS rates will rise. But prices in general won't rise nearly as much.
 
If you sell electrons, things are great. If you sell atoms, it's not so great. But, even here, there are exceptions. If you sell homes, prices are falling. Commission income is way down. But this is not price deflation. This is a falling price of a specific product. Rents are not falling. They may be rising. The CPI and median CPI are tied to rent, which I think is correct. Rents did not rise as much as home prices did, 2000-2007, and rents have not fallen as much since then.
 
For poor people, rising prices are a real problem. The things they buy more of are going up in price. But this is not inflation. It is a rising consumer good class. For middle class people, falling home equity is a big problem. This is not deflation. It is a falling asset class. Because most people focus on what hurts them, they get price inflation or price deflation confused with asset price changes.
 
Price inflation is where most prices are rising.
 
The closer you are to digital technology, the better off you are as a consumer. If you use digital technology to sell information to people who are in fields that do well in inflationary times, you are in hog heaven. I am such a person. I encourage you to become one.
 
If you make money as a middleman/broker, and if you are a wise shopper, this is a great economy for you. You buy very low and sell higher, though maybe at a discount from retail. Think: "a buyer of foreclosed homes, who rents to people who cannot afford to buy." This is John Schaub's strategy. It works best in times of price inflation, but it always works.
 
The coming price inflation will be bad for poor people. It will squeeze salaried people. I think it will be a bonanza for fast-moving entrepreneurs. What will sink most of them is the Great Reversal, when the FED finally stops inflating. A lot of them will not reverse course and get into cash/debt-free living. But that is years down the road.
In the meantime, buy top-quality durable goods that are sold by people who are in a jam. That means Craigslist. This means paying cash. The bargains are out there for people with cash.

Pay retail for new tools that are vital for your work. Pay retails for cheap products where cost savings are higher than the value of your shopping time. Buy at Dollar General/Dollar Tree for staples other than food. Buy in bulk there, not for cost savings but time savings: fewer trips to the store. Take advantage of a non-inflationary situation before it becomes inflationary.

Comprehension Questions

1.  According to Dr. North, is the rate of price inflation more or less today than it was in 2005? 
2.