The Benefits of Deflation: Inflation Be Damned!
If inflation erodes the value of our currency over time, then it must be true that deflation strengthens the value of our currency over time.
Deflation happens when people are scared to spend. When people are scared to spend, the demand for goods and services goes down. When the demand for goods and services goes down, prices come down. When prices come down, people don’t spend because people believe that prices will come down further. Pretty soon, the entire economy is going in reverse!
For for most of us working stiffs, is deflation really so bad? We just learned that the median US net worth in 2010 was only ~$77,000, meaning the typical American doesn’t have a lot of assets! Even if we have 100% deflation, the most the median person can lose is $77,000, unless of course they are leveraged to the hilt.
THE THINGS WE CARE ABOUT MOST
Americans eat a lot. Studies say that more than 50% of us are overweight with the percentage growing. Wouldn’t we be happy if all you can eat roast beef buffets only cost $14.99 instead of $24.99? Imagine if donuts where no longer over $1 each but only 25 cents a pop? We could eat 10 donuts each for just $2.50! French crullers are the best. Yum, yum.
Homeownership has declined to around 65%, with the median home equity accounting for ~90% of total net worth at around $72,000. For the 35% who don’t own homes, hooray! Cheaper home prices means cheaper mortgages. For the 65% who do own homes, who cares? Your home is for shelter. You’ve got to live somewhere, so it’s not like you can sell it unless you’ve got a second home. Just start diversifying your net worth already because 90% is way too much in property.
Healthcare costs are out of control here in the US vs. other countries such as Canada, Australia, and France. Stories of $20,000 surgeries in the US, which cost only $1,000 in Canada are befuddling. Monthly premiums for over a $1,000 for a family of 3 for the self-employed when the median household income is $50,000 is quite expensive. Wouldn’t you want healthcare costs to fall more inline with other developed countries?
It currently costs $15,000 for public school tuition and $40,000 for private school tuition on average. I know plenty of couples who have delayed having children until they are more financial ready because of the fear of tuition. The irony is, they should have as many children ASAP since the longer they wait, the more their tuition will go up! It is a crying shame that tuition prices are estimated to double in the next couple decades, far outstripping wage growth. Not all of us have the sweet HOPE program like high schoolers in Georgia do where their education is free if they maintain a 3.0+ GPA.
Oil and Gas
In 1994, regular unleaded gasoline was $1 a gallon. We’re now at $4 a gallon even with the 20% decline in oil prices from $104 to $82 in 1H2012. Oil is a huge tax on the average consumer. High oil prices makes me want to cut down on my trips to Tahoe, thereby spending less money on leisurely activities, thereby reducing the economic activity in the Lake Tahoe region. If gas prices were doing to the $1 again, I’d go on road trips every single week and not care.
Americans are addicted to spending money we don’t have. With the 10-year Treasury hovering at 1.65%, rates are as cheap as I’ve ever seen them. Mortgage and credit card rates are both relatively low, and will hopefully stay low for a very long time. The Federal Reserve doesn’t have to do much since the market is adjusting rats lower for them.
Although deflation means that interest rates are low, and that our return on our cash in CDs and Money Markets are therefore also low. True deflation should strength the value of our currency vis a vis the things money can buy. Therefore, if people can just save more money, we’d be all much better off.
DEFLATION SCREWS THE RICH MORE AND HELPS THE POOR
If you are super wealthy, it usually means you have an incredible amount of assets. You hate deflation because the value of your assets are deflating by definition. For the rest of us working folk with mortgages and tuitions to pay, deflation is one of the best things we can hope for!
Our wages are already lagging behind inflation. With deflation, maybe we’ll have a shot of finally keeping up. And if not, we are already used to always falling farther and farther behind anyway.
Deflation is also wonderful for those of us who are retired. We don’t have to work as hard for less and less real pay anymore. In fact, we don’t have to worry about getting a pay cut or losing our jobs either! Seeing our fixed income shrink is disheartening. However, if we can see the value of the things we buy deflate faster than the decrease in income, retirees are net winners.
It’s unclear whether we will experience overall deflation in the coming years. What is clear is that inflation in America, and globally are at their lowest levels in history thanks to the recent economic crisis. I don’t believe there will be any significant inflation in the next four years, which is why I am an advocate of borrowing money at the short end. The markets are swift, and policy makers are much quicker to act than ever before.
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About the Author: Sam began investing his own money ever since he first opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college on Wall Street. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 35 largely due to his investments that now generate over six figures a year in passive income. Sam now spends his time playing tennis, spending time with family, and writing online to help others achieve financial freedom.
Picture: Santorini cliffs where property is deflation, SD.