U.S.A.'s last period of sustained, declining prices occurred during the Great Depression. Two philosophies had been battling each other since the roaring 1920s.The "old" school taught that people should save for their future. The "new" school taught people to live for today. (Does this sound familiar?)
The pendulum swung toward the "new" school in the 1920s. After the stock market crashed starting in October 1929, people were scared and, if they weren't wiped out already in the crash, they started spending less.
During the first four years of the Great Depression, prices plunged 25%. Falling demand and prices led companies to lay off more employees. The peak unemployment rate reached 25% in 1932.
The Fed knew that the economy was sinking and reacted quickly by lowering its discount rate eight times between November 1929 and May 1931, the last one of which coincided with the collapse of a huge bank, Austria's Kreditanstalt.
(Incidentally, for those of you who love "The Sound Of Music," the real Family von Trapp lost everything when Kreditanstalt went bully-up.)
Late in 1931 and again with Roosevelt's inauguration in 1933, the Fed sensed (wrongly) that the economy was picking up steam and raised interest rates. Each time they did so, the economy stumbled further.
Where's The Beef?
Fast-forward to today. Until now, the Fed has lowered rates thirteen times since 2000, albeit in generally smaller amounts than did the Fed in the 1930s.
U.S.A. federal unemployment rate, officially at 6% but probably closer to 12% in reality, is nowhere near the crisis level we saw in 1932.
Although we are seeing deflation in several consumer goods, especially electronics and textiles, we are still seeing increases in areas which matter the most, such as housing, groceries, insurance and non-federal taxes.
The Consumer Price Index (CPI) was flat in May and up 1.7% over the last year, matching 40-year lows. This is a different scene from the deflationary spiral we saw in the early 1930s.
