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. 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

Food Deflation

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.

Fundrise cumulative returns of client accounts

Healthcare Deflation

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.

It would be awesome of there was college tuition deflation. Then, I wouldn't have to save so much in our children's 529 plans and make them 529 plan millionaires. It's ridiculous!

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%.

U.S. inflation expectations for 2022, 2023, and 2024 if the war in Ukraine continues

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.

Inflation and income growth - Deflation is unlikely

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.

private real estate investment dashboard

Wealth Management Recommendation

Get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place. Before Personal Capital, I had to log into eight different systems to track 28 different accounts. Now I can keep track of everything by logging onto Personal Capital.

The best feature is the 401K Fee Analyzer which has saved me over $1,000 a year in portfolio fees I had no idea I was paying. Personal Capital takes less than one minute to sign up. It is the most valuable tool I’ve found to help people achieve financial independence.

Planning for retirement when paying for private grade school
Link up your accounts and see whether you're on track to retirement in great shape or in poverty

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.

23 thoughts on “The Benefits of Deflation: Inflation Be Damned!”

  1. Mr. Samurai, I am having a hard time understanding deflationary spiral. If one neglects the non-real sectors of ‘the economy’ that is speculation and financial services, and there remains stable production of goods and “essential work”, it seems the rich remain rich and the poor remain poor, while the middle become richer, and debt (including government owned) is harder to pay off. Thus deflation is always a nightmare scenario for the regime…which currently pushes hyperinflation, worse than in the 70’s I’ve heard since the accountants and linguists changed the definition of the CPI and other such measures, in which hyperinflation – stagflation, also – keeps the poor poor, the rich rich, and the middle class becomes poorer while debt is easier to pay off for those speculators and governments which have loads of debt. I keep hearing also the lies of the interest rates: Denmark had real negative interest rates recently where people were paid to take out mortgages, therefore deflation is possible and would greatly benefit the middle class and keep a check on government spending and investment in speculative schemes which produce no real goods. The idea is that the currency is being used as population control to “Save the Planet!” and “Go Green!” since WOMEN deny childbirth and seek baby killing. Deflation of the currency would seem to weaken government and central bankers and therefore lead to regime change away from authoritarians, to decentralization, such as in Bitcoin, which is the nighttime goodnight scenario for the creeping totalitarian globalist governments.

  2. Deflation hurts those with tuition fee loans MORE. If I owe someone $100,000 and my income slowly falls then the debt is increasing in real term. Those with $100,000 worth of gold or silver or whatever in their safe are going to see that being worth way MORE in real terms.

  3. Well. How about the deflation over these last couple years? Deflation is great if you are trying to save or to pay off debt. And america has a lot of debt that will likely never get paid.

  4. 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.

    1. 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.


  5. 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).

  6. 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.

  7. 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.

  8. 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…


    1. 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!

  9. Ornella @ Moneylicious

    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.

  10. Traineeinvestor

    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.

  11. 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.

  12. 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.

  13. 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.

  14. 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.


  15. 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!! :)

    1. 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.

    2. 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.

Leave a Comment

Your email address will not be published. Required fields are marked *