Obama Assuages Fears of Deflation While Pushing Small Businesses Back on the Agenda

(Austin, TX) November 24, 2008 -- In an attempt to conquer the mounting fears of depression and deflation, President-elect Barack Obama’s Saturday radio address touted a stimulus plan far grander than what had been advertised during his campaign – 2.5 million new jobs over the next two years with a price tag between $500 and $700 billion. While Obama campaigned on relief for small businesses, it might be awhile before we see those proposals come to fruition.

Obama further restored investor confidence with his announcement of New York Federal Reserve President, Tim Geithner, 47, as Treasury secretary. Obama holds that Geithner offers "an unparalleled understanding of our current economic crisis, in all of its depth, complexity and urgency." Much of today’s deflation anxiety stems from observance of the widespread banking crisis which hit Japan during the 1990s. Tim Geithner was “Treasury attaché in the Tokyo embassy for the first half of that decade” (Bill Powell, Time Magazine). Although officially released Monday, word that Obama was likely to choose Geithner sent stocks soaring at the end of last week.

Over the past 5 years, we’ve seen salaries struggle to keep up with inflation and therefore Americans have been borrowing more and more money. Core inflation, a measure of inflation excluding items that face volatile price movements (like food and energy), is now negative which has increased the average American’s buying power. This obviously helps workers even if it hurts companies. However, when consumer prices fall, spending collapses. As seen in the Great Depression when “supply swamped demand, driving prices down,” lower prices also raise the threat of deflation (Dallas Morning News). The U.S. Labor Department reported that consumer prices fell 1 percent in October from the previous month, the biggest fall since 1947, and while the consensus is that deflation is a remote possibility, it should still be taken very seriously. In a recent interview, Democratic Senator Charles Schumer said “the nation is on the brink of the same kind of deflationary spiral that pushed down prices, closed businesses and obliterated jobs during the Great Depression” (Lori Montgomery, Washington Post)

What would deflation mean for the country?

1.    As prices fell and old debts stayed fixed, companies would have a harder time repaying those debts and bankruptcies and unemployment would more than likely increase.
2.    Deferred spending would further slow the economy. If people feel they can count on prices dropping, they wait until the next month, or the next month, etc. to make a purchase and while they wait, the economy spirals downward.

Richard Berner, chief U.S. economist for Morgan Stanley, writes, "The ultimate bastion of defense against deflation is a Fed committed to avoid it at all costs" (Bill Powell, Time Magazine). What might the Fed do? According to Reuters’ Alister Bull, “some economists believe the Fed will cut [interest] rates to zero over the next three months.” Obama and his economic team plan to hit the ground running, hoping to pass a strengthened stimulus plan as soon as the President-elect enters office on January 20th.

For the small business owner, however, relief may not come as quickly. Matthew Bandyk (U.S. News) argues that “while many industries from life insurance to the automotive companies have been asking for a piece of the bailout money, it is harder for small businesses to get Washington's ear. Large businesses make the argument that the economy can't afford for them to go bankrupt.” The financial crisis and another stimulus package now top the already substantial list of topics likely to eclipse small business issues.

The Senate Committee on Small Business and Entrepreneurship, led by Sen. John Kerry, has urged current Treasury secretary Henry Paulson to “use a portion of the rescue package to purchase government-backed small business loans through the Troubled Assets Relief Program (TARP)” which would “provide immediate relief to small businesses shut out of the credit market because of a paralyzed system” (Market Watch). In October, on the other side of the election, Obama proposed a “small business rescue plan” or tax incentives and loans. CNNMoney.com’s Stacy Cowley and Emily Maltby reported the following:

Obama's new plan calls for the SBA's loan guarantee programs to temporarily eliminate the fees they charge lenders, and for the agency to increase the guarantees it offers to banks that lend to qualifying small companies. Additionally, he wants the SBA to expand its facility for directly lending money to small companies through its Disaster Loan Program.

While the Disaster Loan Program is designed to aid businesses affected by natural disasters, it “does occasionally offer loans to help with nontraditional disasters” (CNNMoney.com). “There are no quick or easy fixes to this crisis, which has been many years in the making, and it’s likely to get worse before it gets better,” Obama said Saturday with the kind of honesty the American people will need to suffer the storm. The question is how many small businesses will go under while waiting for the change Obama’s promised?

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