The Benefits of Deflation: Inflation Be Damned!

Greek DeflationIf 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.



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?

College Tuition

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.

Interest Rates

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.

Financial Security

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.


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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Updated on 12/1/2014. The bull market is alive and well. Don’t forget to rebalance and manage your risk exposure. Everybody feels like a genius during good times.

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.



Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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  1. says

    Is having a weak dollar such a bad thing? Japan back in the day built their success on a weak yen. China relies on a weak currencies to make sure their exports are unrealistically cheap. A decade or so ago, when the dollar was weak, we had multiple foreign auto companies build plants here, simply because the dollar was weak. I say let’s do that kind of thing again!

    I’ve yet to find someone who can make a strong case that what we want is a strong currency.

    In a deflation economy, money in the bank (old fashioned savings accounts) are golden, because $1 in cash buys more and more as time goes by. In an inflationary economy, you want assets that appreciate, like houses.

    I don’t think inflation or deflation helps the rich or the poor – it depends where your assets are concentrated.

    If you have no assets, then it comes down to income. In a deflationary income, you run a very high risk of losing your job, business, farm, source of income. If you can pull off the ultimate “Depression trick” i.e. have a job, you’re good. Then, not getting a raise is still a raise as prices around you go down. But it’s not as automatic as it might sound (oh, I’ll just go get a job). Remember the Great Depression, the ultimate deflation story.

    All that said, I don’t believe the Fed and Uncle Sam are going to allow deflation to hit again. That’s the primary reason for all the “quantitative easing” and they’re not going to quit that until the specter of deflation has been killed completely.

    This was a very thought provoking article and I enjoyed it. Great job!! :)

    • says

      The poor have little to no assets, hence why deflation hurts the poor less than the rich. The key therefore is to start accumulating assets during a deflationary environment in hopes that inflation does return some day.

    • says

      Deflation is the natural result of more efficient production and the expansion of knowledge. Look at electronics technology. Better forms of production and more efficiency let the prices come down every year. Why doesn’t that happen with other things? In general, we’re producing more food, education is becoming more available, and people more productive. The only reason prices go up each year is the currency. It is entirely because of the production of more dollars, which really is counterfeitting. The FED and the banking sector can and do make dollars out of thin air whenever they can, because inflation (or counterfeitting away the value of the existing dollars) benefits most those with earliest access to money. The poor certainly aren’t those people. Banks and government sure are.

  2. Mike Hunt says

    Hi Sam,

    Don’t the wealthy have a lot of CASH, which does very well in deflation?

    Don’t forget that P/E ratios tend to come down in both inflation and deflation… so it is a good time to take a look at buying stocks potentially.

    Salary may be cut if the environment is deflationary. Lenders would be happy though, provided they get paid back.


  3. says

    Yeah, I don’t think all of the businesses would keep salaries the same. If demand decreases it’s likely profit will decrease meaning less jobs. I like the theory on the rest of it though. You’d like to think gas/oil would go down along with electricity prices but I’m not sure if I believe that would happen. I understand what you’re saying, I guess I’m just skeptical. I think some of those industries would be glad to continue to charge ridiculous prices.

  4. says

    I don’t think we’ll go through a major deflationary period anytime soon. I also hope that we don’t go through inflation either. If we did go through deflation though my guess is companies would start cutting salaries at some point.

  5. says

    I am worried about all of these things. Healthcare costs and college tuition costs worry me the most. My kids are young (3 and 1) and imagining what their college may cost is the stuff of nightmares!

    Overall, I am not too worried about inflation or deflation. Either way, I will just have to find a way to benefit.

  6. says

    Ah deflation. It does have a bit of a nice ring to it. I would love to see some deflation in food costs. I like your comment about donuts too, haha. I don’t really eat them now, but yeah if they were only 25 cents each I probably would enjoy one once in a while!

    And that’s an interesting point about people trying to have their kids sooner rather than later with the crazy amount of inflation that’s affecting education. Couples should still make sure they are financially ready to take on the responsibility of becoming parents of course, but that certainly is an advantage to having kids now versus in 5 years. Hopefully there will be a movement to lower the rising tuition costs though because it is crippling the future of our economy.

  7. Traineeinvestor says

    Deflation will produce shortages as many businesses go bankrupt with revenues falling faster than costs, negative equity cases as house values decline but mortgages do not, rising unemployment as businesses cannot afford to keep staff and salary cuts for those who remain employed, a collapse in government revenues as profits and incomes and the taxes paid on them collapse with the inevitable increases in tax rates and cuts in entitlement programmes that must etc etc.

    There was lots of deflation in the 1930s and I don’t think that’s an economic experience anyone would be keen to repeat.

  8. says

    Your comment about donuts is very true for me! :-) At a Quik Trip gas station they offer delicious glaze donuts. I don’t know where they get it from but they are yum, yum.

    I don’t see deflation threatening use, yet. Rather I see inflation over the coming years. Interest rates are historically low and a modern economy can only sustain low interest rates for certain period of time. I will make this observation: today as I as heading to the gym and then running errands, there was no shortage of cars on the road and long lines at the grocery story–from Costco to Kroger to Walmart. I think the demand for our goods and services we consumer on a daily basis wouldn’t be impacted by deflation.

    I understand that falling prices would give people/consumers an incentive to delay purchases until prices fall further, but what I’ve learned about human behavior versus standard economic theory, is that human emotions override most rational decisions.

    Where I think deflation would probably come in to play regarding consumers purchases are in the items we don’t buy on a daily basis–TV, homes, etc.

    I enjoy your article…very interesting perspective.

  9. Mike Hunt says

    One other comment- I think it is fair to say that prices can rise and fall without having inflation or deflation, but rather based on supply and demand.

    Inflation or deflation takes place if there is too much money in circulation chasing too few goods and services (inflation) or too little money in circulation to keep up with the level of goods & services being sold (deflation). Price increases of certain items does not make the case for inflation or deflation. I’d argue that for the moment we have monetary stability and we are in neither case of inflation nor deflation. This is evidenced by the low 10 year yields and healthy stock market. Everything is rational, right…


    • says

      Mike, do you think we are therefore in monetary stability scenario now?

      It is incredible how cheap money is now. I’m not sure what people who are renting and want to buy a house are waiting for.

      Let’s see if the stock market gains can continue!

    • says

      If we have monetary stability, then how do you explain the monetary expansion policy the Fed has been pursuing? By your own definition this is increasing the money in circulation, hence inflation.

      The first indications of inflation are usually commodities, especially food and energy. It takes time, but it eventually spills over to other consumer goods in general. Essentially, the things not tracked in the CPI, which is why the government uses the CPI for its official inflation rate. :)

  10. says

    As you said Sam, demand for goods drop during periods of deflation. While the value of the currency strengthens from the lower price of goods, job loss is an unfortunate outcome. Workers will be laid off to compensate for the diminishing demand. As more and more lose jobs, demand continues to spiral downward.

  11. says

    Great points, Sam. It does seem to affect those with a high net worth more than the poor. I agree with your point about diversifying investments other than personal home. It’s never a good sign when your net worth drops 30k in a matter of months because you have most of your investments in real estate with a volatile market.

  12. says

    The deflation you’re talking about helping the poor is price deflation and it helps everybody.

    As for hurting the rich more than the poor… I don’t see how. Yes, the rich own more assets, but the poor have more debt.

    If the economy were to fall into a deflationary spiral, and wages were decreased it’s the poor who would be hit hardest because they would have a more difficult time paying back the debt.

    By contrast, the wealthy have more flexibility and could liquid their assets and put that money into whatever was gaining value.

    In the end, it’s a moot point and an academic discussion because the chances of deflation are virtually nil since the government is doing everything it can to inflate its way our of debt at the expense of the citizens.

    Don’t believe the official inflation numbers -there’s a reason they exclude food, oil and other commodities people need. The official reason is to smooth out volatility, but those volatile commodities also happen to be where the money goes when the fed opens up its printing press.

    • Heinz G says

      Well said Joe. As far as the government being renter side… they are on neither side. They will continue to spend as this allows them to stay in office. Politicians win votes with spending, not long term fiscal responsibility. There is no way, zero chance, the USA can pay off it’s debt. At best, we can inflate or way out of some of our obligations.

      Inflation hurts anyone with USDs but hurts the poor the most. People with weath can react to inflation more quickly. Not only in the ways Joe mention but they can adjust prices on the fly (i.e. increase the cost of your rent).

  13. Emilie says

    I’ve never felt more pain and disagreement while suffering through and article.

    Deflation does NOT benefit the poor, as the general population lives in debt. During deflation the value of debt of a borrower rises and becomes increasingly more difficult to repay.

    Yes. This does cost the rich a lot as well as the poor.

    • says

      Did you really just say that the general population lives in debt? How little you think of the general population.

      If real estate and the stock market and tuition is inflating at 60% a year as an extreme example, how do you expect anybody without assets to ever catch up?

      Share with us your asset ownership or renting story.


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