Listen: The World Turned Upside Down: An End to Inflation?

On this MPR Special Report, the American RadioWorks documentary “The World Turned Upside Down: An End to Inflation?” looks at inflation, deflation, and how the U.S. Federal Reserve keeps a watchful eye for BOTH.

Documentary includes historical context and various commentary from economists and business leaders.


1999 G. & R. Loeb Foundation Gerald Loeb Award in Radio category

1998 Medill School of Journalism/Strong Funds Financial Writers and Editors Award, Best Broadcast Feature or Broadcast Series category


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[SCANNER BEEPING] BILL BUZENBERG: Keep your eye on the grocery scanner. Cereal is cheaper. A bar of soap costs less. Meat prices are down. Prices are also dropping for cars, refrigerators, computers. Is it a good thing when prices fall?

PAUL WARNER: Oh, the consumers are getting a lot more for less, a lot more.

BILL BUZENBERG: Yes, but there is also danger in deflation.

GEORGE EVERETT: Papers all said Imation's going to lay off a thousand people. For some reason, I knew I was one of them right there.

ROBERT REICH: I don't want to be Chicken Little. I don't want to predict that any of this is going to happen. But we have to be vigilant against the possibility of accelerating deflation.

BILL BUZENBERG: Coming up, The World Turned Upside Down, a Minnesota Public Radio special report on the promise and risk of deflation.


First, this news.


This is a special report, The World Turned Upside Down-- The Risks and Rewards of Deflation. Hello, I'm Bill Buzenberg, news director of Minnesota Public Radio. In the next hour, you'll hear how our economy entered the world of stable or falling prices. We'll revisit two disastrous deflationary episodes in American history. We'll also examine the impact of deflation on consumers, workers, and investors. To keep things in perspective, we'll also check in periodically with our Deflation Support Group. Your host this hour is economics correspondent Chris Farrell. Chris, let's begin with some basic financial definitions. What is deflation?

CHRIS FARRELL: Well, Bill, in an economy like ours, prices are always going up and down. Prices for steel, milk, or some other product go up when demand is strong and supply low. Prices drop when supply outruns demand. Now, inflation is another matter. It is a general rise in prices. Deflation is inflation's mirror image. Deflation is a general decline in prices.


In 1965, an AM/FM clock radio like this one, plastic cabinet, analog clock would have cost you about $40 or $204 in today's dollars.

[MANFRED MANN, "DO WAH DIDDY"] There she was, just a-walkin' down the street, singin'

In 1998, a simple AM/FM digital clock radio at Target runs about $10. And it sounds a lot better.

[THE LOX, "IF YOU THINK I'M JIGGY"] If you really dig me, and you think I'm jiggy

In a sense, the US economy these days is becoming a lot like our radio-- lower prices and higher quality. Over the past year, new car prices are flat, and used car prices are down. A burger and fries costs less, so does a soda or a beer. Computers and other high-tech goods are cheaper by the month. After adjusting for inflation, a gallon of gas in a sport utility vehicle costs less today than when your dad's car had fins. These numbers tell a story-- the age of inflation may be over.

That's right, the age of inflation may be over. True, some prices are going up, such as airline tickets or a hospital stay and cable television. Yet when the government statisticians calculate the change in overall prices, the consumer price index is up less than 2% over the past year compared to 5% in 1990 and 14% in 1980. With low-cost imports heading our way from the troubled economies of Asia, the US is closing in on a zero-inflation economy.

Imagine, for some four decades, the Specter of inflation has haunted America. The energy crisis, soaring food bills, mortgage rates in the high teens. How about Gerald Ford and his whip-inflation-now buttons? Ronald Reagan, at his 1981 inauguration address, echoed the fears of a nation traumatized by inflation.

RONALD REAGAN: These United States are confronted with an economic affliction of great proportions. We suffer from the longest and one of the worst sustained inflations in our national history. It distorts our economic decisions, penalizes thrift, and crushes the struggling young and the fixed-income elderly alike. It threatens to shatter the lives of millions of our people.

CHRIS FARRELL: How was inflation tamed? From the 1980s on, an arsenal of domestic and global forces were unleashed against inflation, from the tight money policies of the Federal Reserve to brutal domestic and international competition. Inflation is now at its lowest level in three decades. Michael Shannon is chairman of Ecolab, a leading supplier of industrial cleaning products.

MICHAEL SHANNON: We have very little pricing flexibility. Just as we are not accepting increases from our suppliers, our customers are not accepting increases for us.

CHRIS FARRELL: Still, with unemployment at 4.6% and worker wages rising smartly, many Wall Street prognosticators are fearful that inflation will break out. Yet a growing number of economists worry that the shockwaves from Asia's economic earthquake could trigger a phenomenon we haven't seen in the US for 70 years. Deflation, the prospect of a broad-based decline in prices, is real, says William Wolman, chief economist at BusinessWeek.

WILLIAM WOLMAN: The fact of the matter is that for most of my life, economists had been underestimating the rate of inflation. In the current period, what strikes me is that economists are sort of underestimating the amount of deflationary force that's in the world economy. So I do think there are very strong deflationary forces in the world economy at work right now.

CHRIS FARRELL: Here's the basic dynamic. A global investment boom was triggered by communism's collapse, the embrace of freer markets by much of the developing world, and the long US economic expansion. Even before Asia stumbled, factories everywhere were supplying consumers with more computers, cars, and other manufactured goods than they wanted. Now, domestic demand in Asia has shriveled, and these troubled nations are pushing hard for more exports through lower prices.

ROBERT REICH: Well, you've got to ask, where is the demand going to come from?

CHRIS FARRELL: That's Robert Reich, the former Labor secretary and now professor at Brandeis University. Reich worries that Asia's economic collapse may set in motion a global deflationary spiral, something we haven't seen since the Great Depression.

ROBERT REICH: If there's not sufficient demand for all the goods and the services being produced, then companies start finding that their profits begin to erode. And they have to lay people off both in the United States and elsewhere. Well, if workers don't have enough money in their pockets because they're laid off, they can't buy things. And obviously, if they can't buy, that means companies can't sell. And you can see, as we go on, how this vicious cycle plays itself out. Again, I don't want to be Chicken Little. I don't want to predict that any of this is going to happen. But we have to be vigilant against the possibility of accelerating deflation, just as we are vigilant and have been against the possibility of accelerating inflation.

CHRIS FARRELL: Should we worry? Despite the largest international financial bailout ever engineered, Asia's crisis could spread in dangerous ways. Japan, the world's second-largest industrial power, has struggled with falling prices for seven years. Inflation rates among the major industrial nations hover between a measly 1% and 2%. The stock market could crash.

Not everyone is worried about deflation, far from it. Arthur Rolnick, director of Research at the Federal Reserve Bank in Minneapolis, can't help but wonder, what is all the fuss about?

ARTHUR ROLNICK: If the prices are falling because, say, commodities are cheaper to buy or foreign goods are cheaper to buy, that should be a boost to our economy.

CHRIS FARRELL: Call it the Walmart economy, a world of everyday low prices. Interest rates are down sharply. Cheaper commodities are slashing the costs of production. The stock market has surged to record highs. The economy is in sight of the longest expansion in the post-World War II era. The nation's leading businesses, such as computers, software, telecom gear, and the internet, are all thriving in a deflationary world of falling prices. After all, today's sub-$1,000 personal computer is many times more powerful than a $10 million computer from the mid-1970s.

Deflation may be a chilling word to some, with visions of bank failures, farm foreclosures, and long lines of unemployed workers in the 1930s, but Bill Wolman of BusinessWeek cautions that deflation is not synonymous with depression.

WILLIAM WOLMAN: The fact of the matter is if you look at the United States in the late 19th century, economic growth was relatively strong even though prices were falling. The price level was stable to falling for a long period of time.

CHRIS FARRELL: So far, stable to falling prices are acting more like a tax cut. People have more money in their pocket. The lower inflation runs, the more workers can buy with their earnings. Jim nor/ is chief investment strategist at Norwest Investment Management.

JIM PAULSEN: A couple of years ago, the level of inflation was about the same as wages. And today, the level of inflation is about one and a half, and wages are still at four. And the result is that real purchasing power, wages have been exploding, and the reason they have is because of deflation.


CHRIS FARRELL: The Mall of America in suburban Minneapolis is a citadel to consumerism. It's the nation's largest shopping mall. Shoppers here have a clear idea of what is happening to prices and that there are plenty of ways to get your money's worth.

SPEAKER 1: I wouldn't say that prices of goods are coming down. There's just more sales. You just get-- they just give you more money off because they can't get rid of the product. So you end up buying stuff on sale instead of just buying stuff at the regular price.

SPEAKER 2: Yes, yes.

SPEAKER 3: But I think most of us are really shopping, shopping for bargains and looking for the best deals.

SPEAKER 4: If it doesn't say sale or clearance, I don't even go into that area because I want the most for my money.

CHRIS FARRELL: Intense pricing pressure means companies are having to rethink virtually every aspect of how they do business. It's a treacherous, tough business environment that punishes inefficiency and bureaucratic bloat and rewards speed and imagination. Take SuperValu, one of the country's largest wholesale and retail food companies. The company did well in the 1980s, with prices rising at a 4% to 5% rate. The real price shock in their industry came in the 1990s. Prices have been rising at a mere 1% pace, and in 1994, SuperValu lived through a year of deflation in food prices. Michael Wright, the company's chief executive, says 12 years ago, there were eight national food wholesalers. Today, there are three.

MICHAEL WRIGHT: When you've got a high inflationary environment, or you've got even not all that high, but if you say 3% to 6% inflation, almost everybody can make money and seem to get along. And nobody goes away in these tougher times when you've got deflation or no inflation. And you don't have a business like Microsoft, which is everybody's buying new stuff and new computers and things, which is a growing business you get rather a stagnant overall sales level. It puts pressure on the poor operators. That's really the way the system is designed to work. You get rid of the weak, and the strong survive.

CHRIS FARRELL: Welcome to the age of productivity. Over the past two decades, companies have downsized, restructured, re-engineered, and invested heavily in high-tech gear, all with an eye toward cutting costs and boosting productivity. Businesses learning how to harness the power of high technology and gains an output per worker are showing up in lower prices and higher quality. The only way companies can charge a higher price in this world is by innovating. The sense of urgency at the St. Paul Companies, the giant insurer, is typical. Patrick Thiele, head of St. Paul's worldwide insurance operations, says the company has a goal of boosting productivity by 5% a year, more than enough to offset its 3% to 4% salary increases.

PATRICK THIELE: We've been able to attain that over the last five years, albeit a little chunkily, but we've had that. I think what really occurs is that for us, much like other service businesses, we are continually replacing human capital with information technology capital. And in fact, we have less employees today than we had five years ago, but our IS spending, our Information System spending, is approximately double.

CHRIS FARRELL: Growth, more than ever before, relies on what Joseph Schumpeter called creative destruction, the tumultuous process by which new technologies, new markets, and new organizations supplant the old. The two most powerful forces of our age, globalization and technology, are combining in ways we can't quite yet fathom to create low prices and low unemployment but massive layoffs and widespread job insecurity for workers.

Assuming that prices don't collapse, a world of low everyday prices is good. It is also very unfamiliar. It took years for Americans to adjust to inflation. But inflation became the devil we knew and understood. Now, we may have to revamp our expectations if prices we pay for goods and services sometimes rise at a moderate pace and occasionally fall at a mild rate. We also need to recognize that the dark side of stable prices is not just inflation but the risk of virulent deflation.


BEVERLY ANDERSON: OK, we're here with the Deflation Support Group. We're listening to the program with our ears and with our hearts.

TED: Yup.

BEVERLY ANDERSON: And we're reacting. I think we can stick--

MARK: Definitely.

BEVERLY ANDERSON: --to first names, don't you?

SYLVIA: Mm-hmm.

MARK: I'd like that.

TED: If you'd like to, sure.

BEVERLY ANDERSON: All right. I'm Beverly Anderson. I'll facilitate.

MARK: All right.


MARK: Yes.

BEVERLY ANDERSON: --Ted, and Sylvia.

TED: Hi.

SYLVIA: Hello.


TED: Yeah.

BEVERLY ANDERSON: Maybe someone would like to respond to the program so far, mhm?


BEVERLY ANDERSON: OK, that's good, good.

MARK: I thought so.

SYLVIA: Excellent, Ted.

TED: Yeah.


MARK: Very good.

TED: Well, it's what I feel.

BEVERLY ANDERSON: Ted, would you care to elaborate on that?


BEVERLY ANDERSON: Maybe not. Can anyone interpret? Mark, you're a male.

MARK: Well, I think Ted is feeling intense, mind-boggling malaise, maybe even a Jimmy Carter-era malaise, except that came from rising prices, but this would be the same, although a mirror image, I think.

BEVERLY ANDERSON: Is that it, Ted?

TED: Well, it's just that I just got used to inflation.



BEVERLY ANDERSON: Didn't we all just get used to inflation?

MARK: I was almost there.

SYLVIA: Yup, yup.

TED: And now I've got to learn something new!

SYLVIA: Well, that shouldn't be a problem for you. Change is the only constant thing.

MARK: But if change is constant, why couldn't things not change for a change then?

TED: Well, no, that would be real change now, wouldn't it?

SYLVIA: Because a change from change to no change would have to change back to change if it were a true change.

MARK: Yeah.

SYLVIA: And then where would you be?

TED: Boy. I've got to go feed the parking meter.

BEVERLY ANDERSON: OK, good points all around.

MARK: Hope so, Bev.

BEVERLY ANDERSON: We've got some really good issues to work with as we find a way to deal with deflation, so I think we're going to have a fruitful hour.

TED: Well, I hope so.

SYLVIA: Better be.

TED: A whole hour?

SYLVIA: Hope so.

MARK: Fruit would be--

TED: My gosh.

MARK: --certainly a good addition.

BEVERLY ANDERSON: Back to our program.


CHRIS FARRELL: If our economy is on the verge of deflation, this won't be the first time. In the past century, the American economy has spun through a handful of mild deflationary cycles. But more drastic episodes stand out as warning beacons about what can happen when deflation whirls out of control. Minnesota Public Radio's Stephen Smith looks back at two such moments in American history.

STEPHEN SMITH: When you think total economic disaster, you think the Great Depression.


The misery began in 1929 and lasted more than a decade. Millions of Americans lost their jobs, their farms, their homes. Many more struggled to stay just above the deluge.

SPEAKER 5: It was a tough period to go through. Things weren't very expensive, but we didn't have any money. You couldn't buy it anyway.

SPEAKER 6: An old farmer worked hard out there in the field and the hot sun, laboring from sun up to sun down. And my husband was out there in the cornfields and things. He said we're not getting nothing for our food. We're not getting nothing.

SPEAKER 7: I can remember one Christmas morning very vividly. We had Christmas services early in the morning that year. And people came with their Christmas cards to exchange with one another because they didn't have the postage.

STEPHEN SMITH: The Great Depression was a worldwide economic catastrophe, the product of converging economic and historical currents that swelled to flood stage in October of 1929, when Wall Street collapsed.

MICHAEL BERNSTEIN: The stock market crash is the great initiating event. It starts the Great Depression.

STEPHEN SMITH: Michael Bernstein is an economic historian at the University of California at San Diego.

MICHAEL BERNSTEIN: It destabilizes the financial sectors of the country, leads to an array of bank failures, where literally banks have to lock their doors because they don't have sufficient cash to meet the demands of their customers. And that begins this sort of precipitous series of events that lead to industries closing down, widespread unemployment, and of course, a great distress in the farm belt.

STEPHEN SMITH: Economic troubles had been building for years before the crash of '29. Throughout the '20s, farms and mines were chronically depressed. 600 banks collapsed each year. Prices plunged. And most households saw a drop in real income over the decade. Yet labor historian Peter Rachleff of Macalester College points out that huge sectors of the economy thundered along, especially automobiles, tires, and electrical products.

PETER RACHLEFF: These were industries where workers' productivity was quite high, but workers were not earning back a significant share of what they were producing. And so workers were increasingly turning to credit as a way to acquire the consumer goods-- refrigerators, vacuum cleaners, radios, and automobiles-- that they were producing. And the wages never caught up and then led to goods being repossessed that weren't done being paid for that led to inventories swelling and workers being laid off or workweeks being cut and spiraled downwards then from that point in 1929 to really a low point in, say, 1932, 1933, when about a third of the workforce was out of work all together.

STEPHEN SMITH: Prices tumbled by some 30%. Historian Michael Bernstein says across the board, deflation lasted almost five years.

MICHAEL BERNSTEIN: It's hard for us to understand living in the late 20th century through so many years of steady inflation. And what might look like a wonderful thing to our eyes, namely falling prices, was, for many, many people in the United States in 1929, a disaster.

SPEAKER 8: When they went after a farmer who could not meet his financial obligations, liquidated them, and took in many instances of everything but the farmer's wife and kids, that was the bitter end for a farmer.

SPEAKER 7: I knew a man who went out, looking for work-- he couldn't find work at a dollar a day-- could not be found.

STEPHEN SMITH: Americans today remember the Great Depression. But there was another dramatic period of deflation also worth recalling, an era in which Americans fought an intense battle over the very value of money.


At the end of the 19th century, the country lurched into a deflationary tailspin. Collapsing railroad companies helped touch off the crisis in the early 1890s. The resulting depression hit hardest in farm country, where commodity shipments depended on railroads and where the bulk of America's population still lived. Bank failures and farm foreclosures swept the landscape. In the winter of 1895, a newspaper journalist described life at a coal mining camp in Iowa.

SPEAKER 9: The 500 mine families of this locality are in the most destitute circumstances. They have little to eat in the way of wholesome food, and their clothing, if it can be called that, is in utter tatters. All have a sickly appearance.

STEPHEN SMITH: A banker in Sargent, Nebraska, wrote.

SPEAKER 10: It is enough to make me heartsick to look at this once-prosperous country. The suffering is terrible. We have several families who, for a month past, have had nothing to eat but flour and water and are very thankful to get that. Scores of women and children stay barefooted for want of something to cover their feet. We are compelled to put our pride aside and ask for aid, immediate aid, anything to eat or wear.

STEPHEN SMITH: Sparked by dropping prices, the depression took hold after a national financial panic in 1893. At the time, the value of the US dollar was pegged to the nation's gold reserves. Farmers and small business owners clamored for relief from Washington. A radical political movement called populism swept the Midwest, demanding that the dollar be based on silver as well as gold. Populists said this bimetal standard would ease the crushing burden of debt and help raise deflated prices. The silver plan was bitterly opposed by the big Eastern corporations who had an economic stake in gold. In 1896, Democratic presidential candidate William Jennings Bryan argued the populist position in his famous Cross of Gold speech, read here by actor Ed Begley.

WILLIAM JENNINGS BRYAN: You come to us and tell us that the great cities are in favor of the gold standard. We reply that the great cities rest upon our broad and fertile prairies. Burn down your cities and leave our farms, and your cities will spring up again as if by magic. But destroy our farms, and the grass will grow in the streets of every city in the country.

STEPHEN SMITH: A catchy line, but it wasn't enough. Bryan lost the presidential race. It may be hard to imagine today, but a wide cross-section of America debated the details of monetary policy. That's because deflation and depression touched every American. The theme was so common that one of our culture's favorite stories is shot through with allegorical references to the fight over silver and gold.


The wonderful Wizard of Oz

The Wizard of Oz was written by former South Dakota newspaperman L. Frank Baum and first published in 1900. The movie came out four decades later. Political scientist Gretchen Ritter of the University of Texas says The Wizard of Oz is an allegorical map of monetary politics in the 1890s. Dorothy represented the common person. Many of the other characters were also allegorical.

GRETCHEN RITTER: So the scarecrow is the average farmer.

THE SCARECROW: I haven't got a brain, only straw.

GRETCHEN RITTER: The Tin Man is an industrial worker who has lost his soul, if you will, lost his heart.

THE TIN MAN: Bang on my chest if you think I'm perfect.




THE SCARECROW: Beautiful! What a nickel!

THE TIN MAN: It's empty.

GRETCHEN RITTER: The Cowardly Lion many people have taken to represent William Jennings Bryan. He is a politician who has a big war but has a little trouble with courage.

COWARDLY LION: I'll fight ya' with one paw tied behind my back! I'll fight ya' standin' on one foot! I'll fight ya' with my eyes closed!


GRETCHEN RITTER: The Emerald City is, of course, a green city, therefore, the City of Money. It is also the political center of the Kingdom, and as such, it's Washington. And so the Wizard, our other big figure, could be taken to be the president or politicians in general, who have power, somebody who promises a lot and delivers little.

DOROTHY GALE: You're a very bad man!

THE WIZARD OF OZ: Oh, no, my dear, I'm a very good man! I'm just a very bad wizard.

STEPHEN SMITH: A key detail changed in the movie was the color of Dorothy's slippers. MGM made them technicolor ruby red, but Frank Baum's original Dorothy wore silver slippers. When she and her chums walked the golden road to Oz, Dorothy was mixing silver and gold. And Oz, OZ after all, is the acronym for the measure of gold and silver, the ounce. Ritter points out that when it comes to solutions, the Wizard is bankrupt. Dorothy and the rest must rely on their own innate powers, just as 1890s Washington held no answers for those suffering from the depression.

DOROTHY GALE: Oh, will you help me? Can you help me?

GLINDA: You don't need to be helped any longer. You've always had the power to go back to Kansas.


THE SCARECROW: Then why didn't you tell her before?

GLINDA: Because she wouldn't have believed me. She had to learn it for herself.

STEPHEN SMITH: About 1897, after five years of struggle, deflation eased. Prices in America started to rise again, and the economy recovered. But not historians say because of the Wizards in Washington. Gold was still the monetary standard. Among the forces that healed the economy, a steady flow of immigration to the US, which created a new, cheaper labor force and a vast new pool of consumers. But even though the American economy righted itself by the turn of the 20th century, it was still vulnerable. Prices were falling again just seven years later.


CHRIS FARRELL: That was Stephen Smith. It is hard to imagine today, but sustained inflation was unusual until the 1960s. Take the era 1870 to 1920. The economy grew fivefold. Incomes nearly tripled. And the US emerged as the world's leading industrial power. The new technology of mass production, the spread of electric power, and a sharp drop in transportation costs all conspired to bring prices lower. As for inflation, prices rose on average less than 1%.

BEVERLY ANDERSON: OK, we're back with the Deflation Support Group. Listening to the show now and feeling very-- would anyone? Very--

TED: Frightened.

SYLVIA: Annoyed.

MARK: Cheap.


MARK: Well, I'm feeling like I don't want to spend anything because whatever I buy will cost less tomorrow. And then I'll feel cheated, and my self-esteem will be damaged because I'll see myself as a chump.

TED: A cheap chump?

MARK: Oh, go ahead, mock me. I'm thinking about myself.

TED: I'm just saying.

SYLVIA: Yup, yup, yup, yup.

BEVERLY ANDERSON: Say, and is that wrong, being cheap? Does anyone think Mark is being selfish for thinking about himself?



SYLVIA: No, I'm fine. I'm fine.

TED: Well, I'm angry.

BEVERLY ANDERSON: Angry, Ted? What's that about?

TED: Well, if Mark's thinking about himself, he can't be thinking about me.

MARK: Darn tootin'.

TED: Me is what I'm thinking about. And I think it would go better for me if everyone else did, too.

BEVERLY ANDERSON: And isn't that the real driving force behind the economy?

TED: I am? Me?

MARK: No! Self-interest, right?

BEVERLY ANDERSON: Enlightened self-interest.

MARK: Wow, OK.

SYLVIA: Which is not the same thing as self-worship.

MARK: Huh.

TED: Worship? Who? Me?

MARK: Oh, relax, Ted!

SYLVIA: You have to think globally, Ted.

BEVERLY ANDERSON: Open yourself to the world, Ted.

MARK: Not everything is about you, Ted.

TED: Well, this whole conversation is about me, isn't it?

SYLVIA: Oh, for crying out loud.

MARK: Oh, not really.

BEVERLY ANDERSON: Good. Good, good. We have lots of feelings. There's good sharing, provocative. Deflation sure makes us think, doesn't it?

TED: Well, not me.

MARK: Something is inflating in here, I'll tell you that.

BEVERLY ANDERSON: Let's get back to the program.


CHRIS FARRELL: You're listening to The World Turned Upside Down. Coming up next, how falling prices are affecting shoppers and workers. The World Turned Upside Down is a production of Minnesota Public Radio.


This is a Minnesota Public Radio special report, The World Turned Upside Down. I'm Chris Farrell. Prices are holding steady or coming down. That must be good, right? Well, American consumers get more for their money, but lower prices can cost jobs. Companies have to sell more goods just to maintain their profits. Bill Catlin has this report on who wins and who loses when prices go down.


BILL CATLIN: At the Best Buy store in the Twin Cities, suburb of Roseville, Brian Smith is watching movie clips demonstrating the virtues of DVD, Digital Versatile Disk, the latest home entertainment gadget. Smith is kicking the tires and thinking about upgrading, but his current home theater system still has bragging rights.

BRIAN SMITH: It's the whole thing with the big tower speakers and the hunter-bot subwoofer, that shakes the living room up real good, makes my cat jump out of his chair and stuff.


BILL CATLIN: One of the clips Smith is watching shows James Bond in an airplane plunging in an uncontrolled dive. The image captures the trend Smith is finding in DVD prices. He says he's surprised at how quickly prices have dropped, but he's not buying yet.

BRIAN SMITH: I'm waiting for DVD to come down another $100. When it first came out, you couldn't touch one for under 600. Now you can get them for four on sale. I'm waiting till they come down a little more in price.

BILL CATLIN: Lower prices are taken for granted in home electronics. But with the help of consumer vigilantes, like Smith, and superstores, like Best Buy, the trend is spreading. More and more industries are having trouble raising prices. Prices have come down for home appliances, small cars, home mortgages, and of course, computers. That's great for consumers who can get more for their money. And with the tailwind of a strong economy, businesses may be able to cut prices and make up for it by selling more goods. But it's an unforgiving environment for any business that makes even a minor misstep.

GREG LUND: It's not like an old line, let's say, the John Deere tractor company of 50 years ago. When the product was stable, the use was stable, the changes that were made were more glacial instead of instant. Today, the changes are instant. You don't really have much of a chance, I don't think, to make too many mistakes and stay in business.

BILL CATLIN: Greg Lund is a spokesman for the South Dakota-based mail order computer manufacturer, Gateway 2000. If there is deflation in the US economy, computer makers like Gateway are at the epicenter. The market research firm Computer Intelligence says the average price of a home PC sold in stores dropped 29% in the last year. The trend appears to be accelerating. Government statistics indicate computer prices posted a record one-month decline in February.


The end of Gateway's production line is stacked with the company's signature white boxes, each one spotted to look like a Holstein cow. Gateway has stayed out of the booming market for consumer machines priced below $1,000. Spokesman Greg Lund says, even so, the company's had to make adjustments at the low end of its products.

BRIAN SMITH: That entry-level price has certainly come down. It's all response to the sub-$1,000 market.

BILL CATLIN: Price competition.

GREG LUND: Indeed.

BILL CATLIN: Last year, Gateway offered a dramatic example of how unforgiving deflation can be. The company overestimated how many computers it could sell to businesses. Parts sat around. As technology advanced, and prices fell, the excess parts were worth less and less. To cut its losses, Gateway settled for much lower profit margins to move hardware. In the fall, the company said it would reassign or lay off up to 300 workers. Third-quarter profits were, in the company's words, "marginal." When combined with other unrelated costs, the company reported a third-quarter loss exceeding $100 million. In the traditionally strong 3 months ending the year, Gateway sales rose enough to overcome declining prices, and profits rebounded. But companies cannot count on that.


Earlier this year, the piano in Elizabeth and George Everett's living room became the sole breadwinner in the household. Elizabeth's teaching income brings in enough to cover most of their expenses if they cut way back. George Everett is a chemist. He holds a PhD and two patents. Everett began his career as the 3M researcher nearly a quarter century ago. He was one of thousands of three emers who went to Imation, a collection of moderately and marginally profitable businesses 3M spun off in 1996. At the time, Everett gave the new company a year before the going got tough. The news he feared hit last fall.

GEORGE EVERETT: The papers all said Imation's going to lay off a thousand people. For some reason, I knew I was one of them right there.

BILL CATLIN: At the time, Imation was selling more of its products. But the gains were eaten up by falling prices and currency exchange rates.

To what extent do you feel that your job was a victim of declining prices in the products that you were helping to make?

GEORGE EVERETT: Probably 90% or more. If there's no money to do it-- if you have no money, you're not going to do research. I mean, that's just natural, so.

BILL CATLIN: Imation says pricing is only one of several factors that contributed to the layoffs. Everett says he's not bitter at losing his job. It's just business, and you've got to take it. But he's taken it hard.

GEORGE EVERETT: The worst part is when I talk to people I know real well. And I just don't feel like I'm the same person anymore if you don't have a job. And you're not the same person if you don't have a job in my mind. So maybe that's overreacting, but that's the way I see it. And people saw me breaking down and all that sort of thing, so.

BILL CATLIN: When you say breaking down, what do you mean?

GEORGE EVERETT: Well, I started crying real bad.

ELIZABETH EVERETT: For him, it's been really, really, really bad. And no matter what I told him, it didn't make a difference. He still felt anxious. It just couldn't sink in, and he couldn't accept it that we were all right. It's been his worst nightmare that would happen to him because he thought this might happen, and he talked about it for months before it did.

BILL CATLIN: Declining prices don't always pull jobs down with them if manufacturing efficiency can keep pace. The Frigidaire freezer plant in Saint Cloud, Minnesota, looks like it's had a fresh coat of paint, giving no hint of its age or history. Roger Jouer is huddling from the snow and rain under an awning across the street. Jouer heads the union, representing about 2,000 workers here. He says the plant dates back to early this century, and by the mid-1980s, its economic survival was in question.

ROGER JOUER: Some of the people had some foresight way back then and realized that we had to get together here to make this facility go.

BILL CATLIN: At the time, employment at the plant was less than half the current level. Layoffs were frequent. The union took a gamble. It agreed to a wage freeze and other cost reductions so the company could invest in new more productive equipment. Back in his office, Jouer says one of the payoffs showed up in the last contract negotiation. The company felt it could increase wages even as it has to reduce prices.

Would it be going too far to say it's good times now for this plant, for your people?

ROGER JOUER: Well, [LAUGHS] I guess I'd have to say it's the best I've seen as far as the number of people working there, the business that we have, the amount of hours that people can work without layoffs, and yeah, I'd say times are good. [CHUCKLES] You can't even argue about that. Jouer says productivity improvements helped the Frigidaire plant outlast its competitors in an era of fierce competition in the home appliance industry, competition that has driven prices down. Just ask Paul Warner, who does the buying for Warners' Stellian, a Twin Cities independent appliance dealer. He's standing next to a wall lined with refrigerators in his Saint Paul store.

PAUL WARNER: Well, we would say that the entire industry has probably been in a deflationary mode for, I'd say, the last seven years. Probably, the most visible would be the refrigeration category.

BILL CATLIN: Can you give me an example?

PAUL WARNER: Well, the price on this particular refrigerator, which happens to be a 25-cubic-foot ice and water dispenser, is $900. A similarly featured box, possibly even less featured box, two or three years ago would have sold competitively in the industry for 1,099, 1,199. So you're talking anywhere from $200, $300, $400 even in some cases, differential even in the last three or four years.

BILL CATLIN: You're getting more for less.

PAUL WARNER: Oh, the consumers are getting a lot more for less, a lot more.

BILL CATLIN: Why is this happening?

PAUL WARNER: The industry is overmanufactured. In other words, we have more production capabilities than demand. And so it's very competitive at the manufacturing level. The only way to put a 10% or a 5% growth on there is to steal it from somebody else. So it's extremely aggressive out there.

BILL CATLIN: Jim Thiers, who runs Hoeft Appliance Center in Saint Paul, says the job isn't as much fun as it used to be.

JIM THIERS: It's hard work. We have to shop as much or more than the consumer because if we don't get the best possible deal, whatever we buy and put on our floor isn't going to sell.

BILL CATLIN: And for all the extra work, Thiers says customers don't really recognize they're getting a better deal on appliances than they have in the past.

JIM THIERS: It's something that, for most people, they do not enjoy shopping for, and they do not appreciate the value that they're getting.

BILL CATLIN: Do people gripe about prices? I mean, you're still looking at stickers of $700, $800, and $900 here.


BILL CATLIN: Back at Best Buy, customers shopping for personal computers do seem to notice that prices are falling, especially if they already own a computer, like Christina Marble.

CHRISTINA MARBLE: It's dramatically dropped than what it used to be five years ago, six years ago, when we first bought the first one. So it's really nice because we're looking at what they give us the here. This one alone has all the extra, extra, extra stuff. And we had a 486 with-- we didn't have a modem in it and didn't have a CD-ROM, and we paid gazillion dollars for it. Now and they give you almost everything for a really nice price, so it really is nice.

BILL CATLIN: A world where prices plunge with no end in sight, what could be better for anyone shopping for a computer? Well, the secret is it quietly drives a lot of them nuts.

SPEAKER 11: Well, it's frustrating, considering the fact that my computer is now worth about the price of the plastic on the outside as opposed to these, which will pretty much take care of my house and do the laundry and the dishes. And this is now doing so much more. I mean, my computer memory is not even in megabytes. It's sort of like, yeah, sometimes, I'll remember.

BILL CATLIN: Are you having more fun now as a computer enthusiast?

SPEAKER 12: I think about it more. The problem is you see such a good deal today, but you're worried about tomorrow that the price will drop significantly on that product, and you could have got the next generation for cheaper. So the products that are coming out are coming out so much faster, too. The changes are just hard for me to keep up with. I think a younger person might enjoy that more than me. But I just-- I've caught in that, well, should I buy today, or will it be less expensive tomorrow?

BILL CATLIN: Call it the hesitation blues. If it's a problem, it seems pretty benign. But that mindset could become the leading edge of a deflationary downward spiral. Consumers wait for prices to drop further, corporate profits shrink, layoffs rise, consumers hold off buying even more, and so on.

CHRIS FARRELL: That was Bill Catlin. The deflationary scenario sounds farfetched right now. The US economy is booming. Jobs are plentiful. And most businesses are complaining bitterly about a dearth of workers. Chemist George Everett recently found a temporary job, though it doesn't pay as much as his previous work. The haunting question is this-- the business cycle hasn't been outlawed. If business has trouble raising prices in good times, what happens when the economy weakens?


BEVERLY ANDERSON: We're back with the Deflation Support Group. Listening to today's program, digesting, considering, feeling, reacting, there's certainly a lot to think about. Hoo! Isn't there? Raw nerves were exposed.

TED: Yeah, I'm convinced I'm not going to buy things anymore. It's just too risky. Deflation is the end of spending.

BEVERLY ANDERSON: And that's a deep hurt for you, isn't it, Ted? Because spending really defined you to yourself, didn't it?

TED: Well, I don't know if it's spending that's important or having. If I stop buying, will I even exist?

MARK: Wow.


MARK: Wow.

TED: I ask you.

SYLVIA: I have had it with the whining. We're Americans, darn it! We have to do our job.

TED: Well.

MARK: Yes, I think so.

TED: Yes, I know that.

BEVERLY ANDERSON: I find myself agreeing with you, Sylvia, but I have no idea what you're talking about.

SYLVIA: Fine. Just look at us. What a pathetic sniveling bunch of cowards.

MARK: What?

SYLVIA: Sure, prices have stabilized. Sure, some are declining. Yes, profit margins are shrinking. Of course, there'll be layoffs.

TED: That's obvious.

SYLVIA: That's life. We can't hide from that.


SYLVIA: Have we forgotten who we are? Consumers.

MARK: Oh, yeah!

SYLVIA: American consumers.

TED: Consumers, right.

MARK: Mm-hmm.

SYLVIA: We beat the Soviets by outspending them. Buying stuff--

TED: That's right.

MARK: Yes.

SYLVIA: --that's what we do.

MARK: Yes.

TED: Right.

SYLVIA: The American consumer--

MARK: That's us.

TED: Absolutely.

SYLVIA: --go! Produce!

MARK: Produce, Yes.

TED: Yes.

SYLVIA: Spend! Rot!

MARK: Yes. Yes.

SYLVIA: Go! Charge!

TED: I believe that.


MARK: Yes.

SYLVIA: Go! Go! Go!

TED: Yes.


MARK: That's good.

TED: Yes.

MARK: I love that.

TED: You're right.

MARK: I heard music.

TED: What?

BEVERLY ANDERSON: I was getting a little frightened. I want you to know we are dealing with some pretty heady stuff, and I-- it's OK to feel overwhelmed.

SYLVIA: I'm not feeling overwhelmed at all. I'm pretty comfortable.

BEVERLY ANDERSON: Well, then we'll have to get to work on that. Let's all take a deep breath. Inflation.





BEVERLY ANDERSON: Sylvia, you're excused from breathing.

SYLVIA: Well, fine.

BEVERLY ANDERSON: And back to the program.


CHRIS FARRELL: The US stock market is at record highs. Interest rates are down sharply. So what are the investment implications of deflation for the millions of workers setting aside money in retirement savings plans? I talked with Dr. Sung Won Sohn, chief economist at Norwest Bank, and Jane Wyatt bond specialist at North Shore Advisors. I started out by asking if we were crazy to be thinking about deflation.

JANNE WYATT: I don't think we're crazy to be talking about it, although I certainly believe it's nothing that we wish for. I think you can't ignore the risk or the implications of what's going on in Asia. And when you have the kind of currency devaluations that we've seen over in some of those countries and the implications of what that means for our producers here in terms of losing complete pricing power in certain products, I don't think it's at all foolish to talk about it. But that's not the same thing as saying that I necessarily expect it for the US.


SUNG WON SOHN: Deflation is a reality in some segments of the economy. For instance, the price of metals, like copper, has fallen dramatically. And commodity prices in general have declined significantly. Consumer price index is basically going nowhere near zero, considering the fact that this is a very mature stage of an economic cycle. Ordinarily, we should be seeing acceleration in inflation, but we are seeing deceleration, disinflation at this stage.

Asia, that's another area. They basically have a depression. You go to Korea, Thailand, Indonesia, even in Japan. Economic conditions are very depressed. Prices of almost everything other than imports, they are falling. Real estate, cars, bicycles, anything manufactured locally, their prices are falling in US dollar terms. That is deflation. So I think it is a very realistic assessment of the current situation.

CHRIS FARRELL: You've convinced me, at least that to think about deflation. Is it time to put my money in a mattress? What do you do as an investor if there is this prospect of deflation?

SUNG WON SOHN: I think it depends. If you expect the 1930s style deflation, where prices actually declined significantly on a continuing basis, well, putting money in the mattress might be an option. But that is not what we are expecting. If you, for instance, expect prices to be flat to declining to a minor degree, that actually is very good for the stocks and bonds. Certainly, interest rates will be declining, and that is good for bonds. And when we have small deflation, that has been very good for the stock markets.

On the other hand, you have to be selective in getting into the type of stocks or industries. If you get into metals right now, such as steel, the multinational corporations are earning a lot of income overseas in the past. Oil, copper, some of the machineries, and even food items, they may not do as well. On the other hand, some of the companies such as financial services, communications, health care, retail trade, and these are more or less insulated from the deflation that we are talking about, and they might actually do better.

CHRIS FARRELL: Jane, what about the bond market? Is this an environment that is great for the bond market?

JANNE WYATT: Well, I agree that I think a moderate-- modest inflation or modest disinflation, either side of the equation, is usually pretty good for bonds and stocks. And I think, yes, we're in a very favorable environment for the bond market. I'm not quite as convinced that this type of environment is going to persist, but again, I keep my eye on what's going on overseas as being a major determinant as to whether we will continue to see the favorable price environment that we have experienced for really for the past two years. But yes, it's a very, very good environment for bond investors, no question about it. But I also agree that if this is able to contain itself, this being disinflation or very moderate inflation, it is also a healthy environment for the stock market sectors considered.

CHRIS FARRELL: Away from your professional life and your personal life, are you seeing inflation or deflation?

JANNE WYATT: I would say, in aggregate, probably very little inflation. And by that, I mean, I have four children. I mean--


JANNE WYATT: --if you look at just simplistic things, like cost of clothing, I mean, it's a-- although prices have gone up, discounting is that you never have to pay full price for anything. Obviously, from interest rates from a mortgage perspective, they have come down. Health care, I tend to agree with you on health care costs. They have come down for us personally, but I don't anticipate that that will continue. The one thing I'd say where we have seen some inflation, and we're going to see more of it because of the El Niño effect, is in food prices.

SUNG WON SOHN: I am seeing a very modest inflation. Today, in addition to management of demand by monetary authorities and technology that we've talked about, our attitude, I think, has changed as well. Today, I, as a consumer, I demand premium service, premium products at lower prices. If businesses are not offering that I'm going someplace else, and I've got a whole lot of opportunities to do that. And that's one of the reasons why simply prices cannot go up. And that tends to squeeze margins, and that means that businesses have to rely more on productivity. And they've got a lot of incentives to rely more on productivity trying to maintain or increase margins, and this is very good for consumers. And this kind of attitude is not going to change anytime soon. I'm not going to change the attitude, and businesses will respond to consumers' demand. So again, that's one of the reasons why I'm reasonably optimistic about inflation in the long run.

CHRIS FARRELL: Sung Won Sohn of Norwest and Jane Wyatt of North Shore Advisors. Coming up, one last visit with the Deflation Support Group and a closing thought. You're listening to The World Turned Upside Down, a special report by Minnesota Public Radio.


BEVERLY ANDERSON: Deflation Support Group, any final thoughts?

MARK: Yes.


MARK: Inflation and deflation are states of mind. I will overcome them.

TED: Yeah.

BEVERLY ANDERSON: That sounds like denial, Mark.

MARK: No, not denial. No.


MARK: It's not.

BEVERLY ANDERSON: I think this is a frightening thing for all of us.

MARK: Well.

BEVERLY ANDERSON: We've lived in a time of constant inflation. To get to deflation, we have to go through stability, which is close to perfection.

SYLVIA: Nirvana?

TED: God, there's no perfection.

BEVERLY ANDERSON: Maybe we're afraid of that moment of perfection, that balance, that stability.

TED: Not me. I'm trying to take ownership of deflation.

MARK: Oh, yes!


MARK: But don't take responsibility for it.


SYLVIA: She's right. We should.


TED: Huh?

SYLVIA: This is all about us. "Inflation" and "deflation" are words for what we do. I am going to take charge. I am going to be the economy.


MARK: Oh, yes!

TED: I like that. I like that.


TED: That's a good one.

MARK: Absolutely.

TED: Yeah.

BEVERLY ANDERSON: Hey, let's all say it together.

ALL: Be the economy.


MARK: Oh! I feel it.

SYLVIA: Because really, we are.

BEVERLY ANDERSON: That sounds like a good stopping point for this week.

MARK: Yes.

BEVERLY ANDERSON: Between now and next time, you know what to do.

TED: Produce.

MARK: Spend.


ALL: Mhm.


CHRIS FARRELL: What an extraordinary moment. America is enjoying a rare period of price stability. The remarkable progress that has been made against inflation is sustainable. Over the past two decades, the Federal Reserve has learned what it takes to run a sensible monetary policy. Inflation phobic investors are eager to help out by sending interest rates soaring at even a hint of rising prices. Vast technological changes, the opening of international markets, and rising American productivity are driving prices lower.

The long-term payoff from a relatively stable general level of prices could be huge. Prices would become a reliable signal that tells companies how the marketplace truly values the goods they make and the services they sell. Price stability allows for faster economic growth and higher living standards. Of course, we could still get brief nerve-racking bouts of inflation. We could also suffer through dark, dismaying episodes of deflation, especially when the next recession strikes. The battle for price stability is never ending.

In 1923, John Maynard Keynes called inflation and deflation evils to be shunned. It is still true. This is our new world, a world where we have to worry about two economic threats-- the risk of inflation and the risk of deflation.


BILL BUZENBERG: The World Turned Upside Down has been a special report from Minnesota Public Radio. Your host has been economics correspondent Chris Farrell. The producer is Karen Tofte, with help from Stephen Smith, Bill Catlin, Stephanie Curtis, Kara Fiegenschuh, and Gary Covino, technical support from Rick Hebzynski. Special thanks for our Deflation Support Group goes to Dale Connelly, Tom Keith, Lynn Warfel-Holt, and Beth Gilleland. Information about this special report is available on the World Wide Web at Thanks for listening. I'm Bill Buzenberg.



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