|
ARCHIVES
|
May 2003
June 12, 2003
Vol. 2
Issue 5
|
April 2003
May 5, 2003
Vol. 2
Issue 4
|
Feb/Mar 2003
March 28, 2003
Vol. 2
Issue 3
|
Jan 2003
February 7, 2003
Vol. 2
Issue 1
|
Dec 2002
December 20, 2002
Vol. 1
Issue 11
|
Nov 2002
November 26, 2002
Vol. 1
Issue 9
|
Oct 2002
October 29, 2002
Vol. 1
Issue 8
|
Sept 2002
October 2, 2002
Vol. 1
Issue 7
|
Aug 2002
September 5, 2002
Vol. 1
Issue 6
|
July 2002
July 29, 2002
Vol. 1
Issue 4
|
June 2002
June 28, 2002
Vol. 1
Issue 3
|
May 2002
May 23, 2002
Vol. 1
Issue 2
|
[MORE]
|
|
|
|  |
|
|
Deflation – Why Should Tourism Businesses Worry???
By Don Holecek, Co-Editor of Michigan Tourism Business & Director of the MSU Tourism Resource Center
 This week Federal Reserve Chairman Alan Greenspan announced another quarter cut point in the short-term interest rate, bringing it to its lowest level in more than 45 years. The good news in this policy action is that it signals the Fed’s view that it sees no sign of inflation looming on the immediate horizon. The bad news is that there is so little evidence of inflation around that deflation may now pose the greatest threat to the U.S. economy. It has been several decades since we in the U.S. have had to be concerned about deflation or have been warned of the perils associated with it. At most, the subject of deflation typically receives only cursory coverage in even advanced courses in macroeconomics, and it seldom receives any coverage in business or popular media. Yet, deflation is a very serious economic problem; a problem for which tools to combat it are few and often ineffective.
 Japan, the world’s second largest economy behind the U.S., has been in an economic slump for over a decade – the cause is deflation. And, the world’s third largest economy, Germany, is expected to enter at least a mild period of deflation in the near future. Like, inflation, the causes of deflation are difficult to pinpoint, but when conditions are right and deflation begins, the pattern that emerges is roughly as follows. Producers cut prices to stimulate demand, but consumers resist purchasing because they anticipate further price reductions. Profits slump, forcing businesses to lay off employees; unemployment rises; investor capital becomes scarce because lenders perceive businesses as well as consumers as poor risks; the overall economy contracts. At this point the nation’s central bank has likely cut the interest rate to near zero (as in Japan), robbing it of its most proven and effective tool for managing the economy.
The situation in Japan also amply demonstrates just how difficult it is to find the right combination of economic policies to combat deflation once it becomes entrenched. While Chairman Greenspan has stated that the risks of deflation for the U.S. economy are small, my guess is that his economic concerns about deflation played a central role in the Fed’s decision to cut short-term interest rates again this week. He wants to avoid what many economists believe to have exacerbated the deflation tendency in the Japanese economy, that being the failure to cut interest rates soon enough to forestall slipping into a protracted economic slump.
So what does all of this economic jargon have to do with Michigan’s tourism industry? Most importantly, we must hope that lower interest rates, more tax cuts and the decline in the U.S. dollar vis-à-vis most other nation’s currencies, create the stimulus the U.S. economy needs to return to healthy growth – even if this comes with a modest increase in inflation. It also strikes me that the tourism industry in Michigan and much of the rest of the world is already in, or very near, a state of deflation. Prices have been cut; consumers have demonstrated that they are hesitant to book vacations until the last minute in anticipation of even greater discounts. This downward spiral is especially problematic for the tourism industry since it doesn’t even have an option like GM or Ford of allowing inventory to build while waiting for the economy to rebound.
More than ever, this is a year when tourism businesses must use every means available (yes, even cutting prices further!) to match customer demand. While early indicators suggest that the summer travel season is off to a slow start, it is far too early to “throw in the towel.” In fact, less than ideal weather conditions likely have given many potential travelers a serious case of “cabin fever,” which they are anxious to cure. A few weeks of good weather can offset a lot of bad economic news when it comes to a stimulating a good, if not great, summer season for Michigan’s tourism industry.
|
|
|
