Deflation 101

I was shopping with a friend the other day and she inadvertently gave me a little lesson in deflation I would like to share.

Deflation: A general decline in prices, often caused by a reduction in the supply of money or credit.
or: A reduction in the level of NATIONAL INCOME and output, usually accompanied by a fall in the general price level.

Now, the following tale is only about one transaction, and I am aware that deflation is defined as a general fall in prices across the entire economy, but I still feel it offers a clear illustration of what deflation looks like in everyday life.

My friend and I were at Barnes and Noble. I was looking for a copy of a Harry Potter book my daughter needed for free reading time at school. It didn't take me long to find it. It was $9.99.
I bought the book and began looking for my friend, as she was browsing in a different part of the store. She walked up to me with a "used" copy of the book she had just found on the other side of the store. It looked exactly like the new book I had just purchased. The difference: it was $3. So, being a rational human (most of the time), I immediately returned the $10 book and purchased the $3 book. I then thanked my friend for saving me $7. That, my friends, is very rapid, deflation.

It is happening all across the country. Retailers are being forced to slash prices to sell their oversupply of goods. Why? There is too much "stuff" out there, and not enough demand. Because of high household debt burdens, unemployment, and increased savings, people are much more price sensitive than they were during the boom. Consequently, retailers have to lower prices to get people to buy anything. Once people realize they have been paying way too much for things, they stop paying too much.

Have you noticed the rise of the thrift store? This is also a result of deflation.

So, perhaps we should look at who will survive. Will it be Barnes & Noble, Amazon, Borders, or Half Price Books? Due to the rise of e-books, there is probably only room for one in the space.
If you can pick the winner and short the losers, you will make a lot of money.

How about OfficeMax, Staples and Office Depot? Again, only one will survive, pick the winner and get paid.

Walgreens, CVS, Rite Aid....I could go on and on.

Circuit City lost out to Best Buy. Linen's and Things lost out to Bed Bath and Beyond.

Don't deny deflation, don't fear it. Profit from it.