Deflation Everywhere As Credit Unwinds

Motorola Tightens Belt Again – Wall Street Journal

Motorola Inc. announced most employees won’t get raises next year and put a freeze on its U.S. pension plan and matching 401(k) contributions as the struggling cellphone maker continues to cut costs.

The moves are on top of $800 million in cuts announced two months ago that include 3,000 job cuts and suspending breakup plans.

The telecom-equipment-maker said it will permanently freeze its U.S. pension plans, preserving vested benefits accrued by employees and retirees but eliminating future benefit accruals, effective March 1. The company said it intends to continue to provide funding to meet its pension obligations to present and future retirees. The 401(k) match suspension begins Jan. 1.

Messrs. Brown and Jha have agreed to have their 2009 base salary cut 25%. Mr. Brown also will forgo a 2008 cash bonus and Mr. Jha’s bonus will be cut by the amount Mr. Brown is forfeiting. The remainder will be taken in the form of restricted stock units.

We will be seeing many more headlines similar to this as the great credit unwind continues.  The panic moves by the Federal Reserve to lower credit costs and increase lending are at the margin as demand and spending continue to spiral lower.  Lower demand, lower incomes and asset destruction due to defaults are all deflationary.

Pay cuts, job losses and salary freezes are spreading throughout the economy with increasing speed and frequency.   As this self perpetuating cycle of lowered demand continues, lower interests rates may have only a marginally beneficial affect.  Employees receiving pink slips, pay cuts and lowered benefits are not likely to be spending more regardless of the level of interest rates.

The Federal Reserve is doing what it is supposed to do by stabilizing the economy, but they will not be able to change the economic fundamentals of a market economy that is attempting to correct past credit excesses.

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