Tuesday, August 10, 2010 Edition #571

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Today’s Highlights:
1st Flash: THE NEW "D" WORD

Weekly Spotlight:

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1st Flash

The stock markets have recovered from the Great Plunge of 2008, causing economists to declare stability in our financial system. The recession is officially over. The fear of depression behind us.

It's time to talk up a new "D" word: Deflation.

Investopedia defines deflation as "A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending."

Deflation is the opposite of inflation. When the annual inflation rate falls below zero percent, the real value of money is increased. More goods can be purchased with the same amount of money.

Falling prices are a good thing, right? With so many people unemployed or underemployed, a lower cost of consumer goods helps stretch a thin income. Sounds logical.

Yet the truth is just the opposite. The lower prices can create a downward negative spiral. Declining profits cause factories to close, raising the ranks of the unemployed, lowering incomes and increasing defaults on loans. And revives the risk of a severe depression.

Deflation also amplifies the pain of carrying too much debt. The borrower is repaying with dollars that can purchase more now than when the debt was incurred.

The Federal Reserve uses monetary policy to guard against deflation. One method is to lower interest rates to spur credit and stimulate demand. We've already exhausted this option trying to relieve the recession. Short-term interest rates have been close to zero since December 2008.

That leaves increasing the money supply to deliberately raise prices, causing inflation. With more money available, spending naturally follows. Demand rises, production grows, profits increase, jobs are maintained.

Deflation can be related to risk. When the return on assets drops to negative, investors and buyers hoard currency rather than invest it. This can lead to liquidity trap, where monetary policy is unable to stimulate an economy. Japan struggled with this condition throughout the 1990s.

The United States has seen three significant periods of deflation. The first occurred in the late 1830s when currency contracted by about 30 percent. The second after the Civil War when we returned to the gold standard and paper money printed during the war was taken out of circulation.

The third was between 1930-1933. The rate of deflation was approximately 10 percent per year, leading to the Great Depression.

Minor spikes of short-term deflation were quite common until just before World War II.

How great is the risk that we'll see a major deflation in the U.S.? Nobody can say for certain. A recent Wall Street Journal poll of 53 economists revealed that they believe deflation poses a bigger threat to our economy than inflation over the next three years by a margin of two-to-one. One economist was quoted as saying "Deflation is dangerously close."

The Federal Reserve Board believes the risk high enough to warrant discussion at today's Federal Open Market Committee meeting. They chose to keep short-term interest rates at their current level and increase the money supply by buying government bonds in an attempt to offset the risk.

Investors are leery. The market was down in advance of today's meeting, but returned to opening levels after hearing the Fed's plan. Buyers are keeping their money in their own pockets with a watchful eye.

We don't know what will happen next. But we can be certain that the natural cycle of ups-and-downs will continue. Do whatever you can on the way up, you'll need it for the long ride down.

2nd Flash

In 1947, President Harry Truman signed into law the National Security Act. The Act created a single government department to oversee and unify our country's military activities. The agency was called the "National Military Establishment" with James V. Forrestal serving as the first Secretary of Defense.

Its acronym didn't sit well. So the agency's abbreviation to "NME" (pronounced enemy) didn't last long.

It was renamed the Department of Defense on August 10, 1949 and today oversees all aspects of national defense, intelligence and security.

The Department of Defense is evolved from the War Department, created by the Constitution of the United States of America in 1789 under President George Washington and Congress. It was a civilian agency that administered the field army under the President (as Commander in Chief) and the Secretary of War.

Retired senior General Henry Knox served as the first Secretary of War. His responsibilities included finance and purchasing, with only a minor role in military affairs.

The War Department was also responsible for naval affairs until the Navy Department was created in 1798. It oversaw the land-based air forces as well until the 1947 creation of the Department of the Air Force.

The War Department split into the Department of the Army and Department of the Air Force when it joined the Department of the Navy as part of the NME.

The War of 1812 brought about reforms in the War Department. It was reorganized into a system of bureaus. The Bureau Chief held office for life. They acted as advisers to the secretary of war while commanding their own troops. Conflicts ensued. The bureaus were regulated by Congress in minute detail.

The agency took on new responsibilities during the Civil War. They handled the recruiting, training, supply, medical care, transportation and pay of two million soldiers of both the regular army and the temporary volunteers.

They oversaw the Bureau of Refugees, Freedmen and Abandoned Lands that took care of refugees and freed slaves in the South. They played a support role in reconstructing new governments in the southern states.

In 1890, the U.S. Army was the smallest of any major power with only 39,000 men. France had 542,000 enlisted. Focus was placed on strengthening our ranks.

The U.S. Military Academy at West Point was enlarged, and U.S. Army War College established. Procedures for promotions were changed and schools organized for special branches of the service.

Administrative structure waffled back and forth over time as needs and prevailing influences dictated. The bureaus lost and later regained their power. A European-style general staff was established, abolished and re-established.

By World War II, the many agencies fragmented authority and burdened the chief of staff with too many details. The Department of War couldn't properly handle a global war effort. The Army was reorganized into three new commands to run the operations of the War Department. The Army Ground Forces were responsible for land troops, the Army Air Forces became an independent air branch, and the Army Service Force handled administrative and logistical duties.

After the War, the three new commands were abandoned and independent bureaus re-established.

The National Security Act of 1947 created the organizational structure we know today.

The Department of Defense employed 700,000 civilians and 1,418,542 members of our military in 2009. Among its many agencies are the Missile Defense Agency, the Defense Advanced Research Projects Agency, the Pentagon Force Protection Agency, the Defense Intelligence Agency, the National Geospatial-Intelligence Agency and the National Security Agency. They operate several joint service schools.

Our armed service men and women sacrifice homes and family to preserve the liberties we cherish. Take a minute to thank them whenever you see a uniformed member of our armed forces, wherever you may be.

Financial News
Productivity in the U.S. increased slightly as non-farm labor showed a 3.6 percent increase in hours worked with a 2.6 percent increase in output. However, there was a 0.9 percent drop in the quarter, ending five straight quarters of strong growth. In a partial offset, first- quarter productivity was revised 1.1 percentage points higher to plus 3.9 percent.

The Federal Open Market Committee met today with few surprises, reflecting the slow move of the economy. They announced that they will the keep the amount of loans on their balance sheet constant instead of expanding. The Fed left the fed funds target unchanged at a range of zero to 0.25 percent. They kept the language that rates are expected to remain low for an "extended period," with one dissenting vote. The FOMC did make a minor downgrade in its view of the recovery but emphasized that growth continues.

Today’s Market Rates
Tuesday, August 10, 2010
Dow Jones Industrial Average
(Up 216.20 or 2.07% since 12/31/09)
10,644.25 (-0.51%)
S&P 500
(Up 5.96 or 0.53% since 12/31/09)
1,121.06 (-0.60%)
(Up 8.02 or 0.35% since 12/31/09)
2,277.17 (-1.24%)
10 Year Treasury Bond Yield 2.781%  
British Sterling 1.5855  
Euro 1.3184  
On The World Wide Web

One mission of the Department of Defense web site is to serve as a starting point for finding U.S. military information online. Find links to their various websites he re.

The 2010 Sturgis Rally is underway. You're more likely to encounter a doctor or lawyer during this 70th anniversary of the event than an outlaw gang member. Get the inside scoop.

Gee Aunt Bee, can it really be 50 years since the debut of The Andy Griffith Show? Join the party in September to commemorate those simpler days of sitting on the front porch. Details online.

Tip of the Week

Children and teenagers are not immune to identity theft. If their identity is stolen, it can take years to discover. Talk to your child about keeping their personal information private. If someone asks for your child's social security number, ask why they need it. If it isn't required, don't provide it.


"Blessed are the young, for they shall inherit the national debt." - Herbert Hoover

Today in History

1949 - President Harry Truman signed the National Security Act, which established a consolidated Department of Defense.

Flash Fact

The Smithsonian Institution estimates that about 95 percent of its collection is in storage rather than on display.

Have a comment about something you read in GCFlash? Suggestions for future articles? Drop us an email!

"Control your own destiny or someone else will." - Jack Welch

Today in History

1896 - Prospectors discovered gold in Alaska, sparking the Klondike gold rush.

Flash Fact

Only about 161,000 metric tons of gold have been mined in all of human history.

Have a comment about something you read in GCFlash? Suggestions for future articles? Drop us an email!
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