Deflation 101

Welcome to the Dolan School of Economics.

Wait, don't click off the page! It may not sound fun, but this is important information we have for you.

We are now constantly hearing about fears of inflation. This concept of rising prices and how they can lay waste to our paychecks, savings and retirement income is one that many of us are familiar with. Our income and savings stay at a fixed amount while the cost of everything goes higher, forcing us to spend more.

Based on that, the recent announcement that prices for energy, food, clothing, and just about everything else posted a record decline last month probably made you want to cheer, right?

Not so fast … here come the Dolans rushing in to steal the punch bowl just as your party is getting started!

Deflation is Not Our Friend

We repeat: it is not our friend. So listen up.

Prices are dropping because we're not consuming. Companies forced to lower prices in this scenario are making less money. When companies make less money, they start laying off workers.

Workers who are suddenly unemployed stop spending money, forcing companies to lower prices even further, which means more job losses and more cuts in spending.

As the old hair products commercial puts it, " … and so on and so on and so on."

Let's out it another way: picture water in a bathtub. Pulling out the drain plug pretty much sums up deflation … the lower the water level gets, the faster it circles the drain.

If the Treasury and the Fed worried before, they'll be panicking now with this latest economic report.

As never before in history … NOW is the time to get serious about your money.

We're here to help you do just that with our special reports to guide you through these tough times:

• 7 Steps to Protect Your Money
• Your Guide to Surviving the Financial Crisis
• How to Keep the Financial Meltdown from Hurting Your Wallet
• Dolan Answer Desk: Your Toughest Questions