Posted on: Thursday, May 22, 2003

THE COLOR OF MONEY
You owe it to yourself to read these pages

By Michelle Singletary
Washington Post

I wince every time I hear people say they don't read the business section of their newspaper.

Inside my head I'm shouting: "Don't you know the information in the business section is so germane to your life?"

It might be titillating to read the entertainment news in the lifestyle/features section, but celebrity comings and goings won't help you understand why you or your friends or your family may be losing jobs or getting paid less.

To a reader who is not used to reading the financial news, business coverage can often seem boring or confusing. And yet it's vital to your financial health to learn as much as you can about what's going on with the economy.

For example, I received this question from a reader: "The Fed recently announced there was a slight chance of deflation affecting the U.S. economy. I have an idea about the nature of deflation. But I'm not certain. What is it?"

Good question.

Richard Sylla, an economics professor and acting chairman of the department of economics at New York University, defines deflation as a fall in the general level of prices.

It's the opposite of inflation, which is a general rise in prices.

"Deflation is bad for a number of reasons," Sylla said. "Debt charges do not go down when the price level falls in a deflation. So deflation is especially bad for business debtors because with prices lower, they have to sell more of whatever goods and services they deal in just to make their debt payments."

During the Great Depression, prices fell a lot in just a few years. Borrowers could not repay their bank loans, so thousands of banks failed, wiping out the bank balances even of savers. When that happened, prices fell even more because people had lost their money.

"In general, business people and consumers make their plans based on price expectations, with the usual expectation being that prices will remain stable," Sylla said. "If instead prices fall, the profits of business tend to go down. So business curtails investment and employment, leading to reductions of consumers' incomes and an economic slowdown."

As the economy continues to falter, the slogan "It's the economy, stupid" has regained popularity among politicians and pundits. Of course they are directing the insult toward President Bush. But the sentiment should apply to all of us.

We all should bone up on the economic terms that play an important role in our financial lives.