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. Let's look at the benefits of deflation even though it current seems like stagflation is more likely due to the rise in energy prices and a slow down in economic growth.
Deflation happens when people are scared to spend. When people are scared to spend, the demand for goods and services goes down. As 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 has gone nowhere in over 40 years! 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.
Post-pandemic, inflation is finally coming down. There is a risk that deflation will arrive, hence we should think about the costs and benefits of deflation.
Deflation And The Things We Care About The 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 $30? 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.
Unfortunately, there's elevated food inflation now post pandemic. Hence, you may want to invest in farmland to ride the food inflation wave.
Shelter / Housing Deflation
The homeownership rate has declined to around 66%, with the median home equity accounting for ~90% of total net worth at around $72,000. For the 37% who don't own homes, hooray! Cheaper home prices means cheaper mortgages.
Housing prices and rents are the biggest beneficiary of deflation. Once you can get your living costs under control, life is much easier.
Personally, I'm bullish on the housing market. I think there will be housing inflation that will push up rent prices and property prices over the next decade.
As a result, I'm investing as much as possible in real estate through real estate investing platforms like Fundrise and CrowdStreet. These are the two best real estate investing platforms on the web today.
So far, I've invested $810,000 in private real estate deals across lower-cost areas of the country. It is awesome to earn more income passively and diversify away from my expensive San Francisco real estate portfolio. Below are the cumulative returns for Fundrise client accounts.
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 $2,000 for a family of 3 for the self-employed when the median household income is $70,000 is quite expensive. Wouldn't you want healthcare costs to fall more inline with other developed countries?
My family of four is paying $2,315 a month for healthcare. Boy do I wish there was healthcare deflation! Alas, I can't fight the system, so I invest in healthcare stocks instead.
College Tuition Keeps On Going Up
It currently costs $18,000 on average for public school tuition and over $40,000 for private school tuition. 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 Prices Are Skyrocketing
In 1994, regular unleaded gasoline was $1 a gallon. Nationwide, a gallon of gasoline is now averaging over $4 due to Russia invading Ukraine. Russia is a top 3 producing of oil and gas.
Rising oil prices 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 would decline to $1/gallon again, I'd go on road trips every single week and not care. I drive an SUV because I have two little children. However, I plan to finally buy an electric vehicle by 2026. The VW ID.Buzz looks sweet!
Interest Rates Are Still Reasonable
Americans are addicted to spending money we don't have. With the 10-year Treasury hovering around 2.77%, interest rates are still relatively low.
As a result, mortgage and credit card rates are both relatively low, and will hopefully stay low for a very long time. If you haven't refinanced your mortgage yet, I highly suggest checking out Credible to get some great rates.
I refinanced during the pandemic to a 7/1 ARM at only 2.125%.
It's actually kinda of baffling that interest rates are still so low with inflation so high. Even with the Fed announcing it will hike the Fed Funds rate, the 10-year bond yield still isn't going much above 2%.
Financial Security Is All We Want
Deflation would be actually welcome for people who are having a hard time affording things. Further, 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 Hurts The Rich More Than 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! Deflation lowers the cost of debt, tuition, healthcare, and more.
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. For now, we've got to get through an elevated inflationary period. Inflation is now at a 40-year high.
Deflation isn't happening now due to surging energy prices and the world coming out of a global pandemic. But deflation could eventually happen one day.
Invest In Real Estate To Ride The Inflation Wave
Stocks are very volatile compared to real estate. Therefore, if you want to dampen volatility and build wealth at the same time, invest in real estate. Real estate is my favorite asset class to build wealth.
The combination of rising rents and rising capital values is a very powerful wealth-builder. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate a significant amount of mostly passive income.
Take a look at my two favorite real estate crowdfunding platforms.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the easiest way to gain real estate exposure.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
I've personally invested $810,000 in private real estate investments so far to earn more passive income. I believe in the long-term growth in the Sunbelt, where valuations are lower and rental yields are higher. Below is a snapshot of my real estate crowdfunding dashboard and $624,000 in capital returns so far since 2017.
Wealth Management Recommendation
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About the Author
Sam began investing his own money ever since he 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 working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He is investing a lot of his money now in real estate crowdfunding. Sam spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
The Financial Benefits Of Deflation is a FS original post.