Are we heading toward inflation? Are we experiencing deflation? What’s so bad about either?
Deflation is when nobody is buying anything and producers lower the prices to get people to buy. Then people see the prices dropping and refuse to buy because the prices will only get lower later. Then the cycle repeats until producers lay off everybody because nobody is buying anything. So we get lower prices but everyone is out of work. This is now.
Inflation is when the money in circulation is getting watered down by more newly printed up money. If we double the amount of money in circulation, prices will double. Things don’t get more valuable, it’s just that the money is less valuable. This is later.
The Booby-Trap, the Banks, and the Boobs
The newly printed up money will only hurt the economy (your money in your account) if it’s in circulation. So the government didn’t put in circulation. They gave it to the banks and said “add this money to your bottom line, but don’t lend it out under any circumstances”. Then they told us the money was for us, for re-financing, for loans. But if the banks actually did lend it out, the money would then be in circulation and destroy the economy with soaring prices and making your savings worthless.
Money is Powerful Only When It Moves
The banks will eventually start moving the newly printed up money. They buy each other, they will buy more re-packaged toxic mortgages. Nothing has changed. These purchases will put the money into circulation, so they will be the source of inflation. The banks will decide when to start the inflation for us by going on a massive spending spree buying up cheap property (see Deflation above) using the free money we gave them, which was supposed to be for our refinancing.
If You Can’t Beat Them, Don’t Play With Them
During Deflation, buy items that will hold their value so you don’t have to buy them again when prices rise. Put your savings in hard assets. That’s why gold and silver are the big thing. Australian investments should be on your list, too. They can’t make your dollars worthless if you have already converted them into chunks of gold sitting in an Australian bank’s safety deposit box. Check out Peter Schiff at Europacific Capital for lots of choices.
Hard Assets get hurt in Deflation; Cash gets hurt in Inflation
You only get hurt when your old assets wake up one day in a different environment, either the environment of deflation or the environment of inflation. Your house says “We’re in deflation now, I used to be worth so much more.” Your bank account says “We’re in inflation now, I used to be able to buy so much more stuff.”
During deflation, you should be accumulating hard assets. Things you’ll need for years to come. (computers, courses/training, tuna, clothes, furniture). Then you need to refinance any loans for the longest possible time at the lowest possible rate. Don’t take the sucker bet of really low for a few years then who knows what because you’ll sell it anyway. You don’t want to be forced to sell just because the bank says your affordable payments have gone up to not-affordable. If deflation continues for many, many years at least you have loan you can afford even though it’s not the lowest in the world, but if inflation hits, you’ll be able to afford it much easier than everyone else.
During inflation, you need to be able to buy and sell. You will have nullified the effects of inflation. If you can make some profit buying and then selling, you not only have made that profit, but you have converted some assets from one environment into the other environment, from “widget equals few dollars” into “widget equals several dollars”. Ever wonder why the stock market goes up during inflation? It’s not because companies are “doing better”, they are just trading old few-dollar-shares into new more-dollar-shares.
You need to know what environment you’re in and where you’re headed.
There are only four possible economic environments:
(1) Inflation
(2) Deflation
(3) Monetary Collapse
(4) Political Upheaval – Revolution
Martin O’Hara writes on business and personal finance related issues. You can learn more by visiting his blogs, Success With Personal Finance and Money Hidden at:
