The Katana: Deflation Is Out Of The Question

I don't talk much about my finances, but I will tell you that I'm in the process of refinancing a couple mortgage loans down by 1% each. The interest savings is tremendous. This makes me think deflation is out of the question. And makes me very positive about consumption trends going forward. Ten other people I know are also refinancing. It behooves you to at least call your local bank and check their latest rates.

It does make me wonder with the strength of the stock markets lately, how the bond market can still be so frothy to provide such record low interest rates. Do remember that the higher treasury bond prices go, the more yields fall. 

Deflation Is Out Of The Question

Could there really be deflation on the way? I highly, highly doubt it. The bond market is telling us otherwise, but I still think deflation is out of the question.

To humor our minds, lets say there is deflation on the horizon. What would you do with your spending habits?  You'd probably stop consuming due to the assumption that whatever it is you want to buy will be cheaper in the future. 

As a result, you'd hoard cash and de-leverage. Bingo, that is exactly what plenty of folks are doing, including myself. This self perpetuating mentality is very damaging to economic progress. 

In addition to delaying consumption, you will probably seek ever higher yields. With the 30-year treasury yielding 2.35% right now, it sure looks like a buy compared to only 1.714% on the 10-year.

When talking about deflation, keep in mind that money is simply a medium of exchange. The more money currency you have, the better as the strength of your currency improves vis a vis the goods and services which it can buy. Frugality really is en vogue again. And I just can't wait until Samurai September when I spend the whole month buying nothing!

Posts That Caught My Eye:

In “A Teacher's Reply To Criticism”, BFS responds to E-dog's scathing post against teachers. A very thoughtful response given BFS's husband is a teacher. I for one believe teachers are highly underpaid. A merit based system that rewards great teachers is a great idea as well. Great teachers have meant the world to me, and I am forever grateful for their tutelage.

In “How To Simplify Your Life”, Forest provides some great tips on simplifying your home, finances, and wardrobe. I absolutely hate clutter and try and donate several bags worth of stuff to good will every month or two. I try and by quality clothing that lasts for a while, and all my retirement finances are automated so I appreciate what Forest is sharing.

Darwin highlights “The 10 Dumbest Uses For Your Tax Dollars In The Stimulus Bill” in his anti-government rant.  I just want to say one thing, “Don't touch my Ant Talk sessions!”

Everyday Tips and Thoughts asks, “How Realistic Is It To Retire By The Age Of 40?”  At 42, Kris provides a very cynical answers to the possibility i.e. “better start saving at birth!”  Good stuff.  I fully plan to try to retire by 40, but it doesn't necessarily mean that I will.  Saving money, making money, it's all just a game frankly because really, how much do we really need to survive.  Not much!

In “Destination Wedding Or Traditional Wedding: Which One Is Cheaper” Young and Thrifty brings up a fun topic that sometimes costs and arm and a leg for hosts and the attendees.  I'm down with both since weddings are so fun!

Further reading

Readers, do you think deflation is out of the question? What are your savings and investing goals for this year?


Sam @ Financial Samurai – “Slicing Through Money’s Mysteries”

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10 thoughts on “The Katana: Deflation Is Out Of The Question”

  1. Congrats on the refi, that’s awesome! …Speaking of spending habits….I’ve donated roughly 2 full carloads of things to charity over the last year and it feels good! It made me realize how many things I had bought over the years without really thinking about if I would use them more than just a few times. A decent amount of the donations were clothes that had gone out of style or were too worn out to wear to work anymore, but there was also a ton of other stuff that had lost purpose and only contributed to collecting dust. I admit that I find shopping enjoyable but I’m really trying to be a smarter shopper. I don’t want to throw my money away anymore when it could be going towards my savings and my future.

    1. I hear you on smarter shopping, which is why i always ask what the return policy is before I buy, b/c often times we NEVER need whatever it is we are buying.

      A minimalist life is fine if you really enjoy it. I just do’t like clutter. It perturbs me and reminds me of waste.

  2. youngandthrfty

    Good on ya for refinancing! My friend refinanced his place and then bought his girlfriend an engagement ring! (That was the big news of this week in my circle of friends). Did you get penalized much though?

    Thanks for including me =) I love weddings too, especially open bar weddings.

    1. Cool. The refinance for one mortgage is covered after the 3rd month, and the other, after the 11th month. Not bad, especially since there are a guaranteed 57 and 49 months after that to save money!

  3. As a UK resident I also don’t see any sign of deflation and have been positioning for inflation.

    In fact I posted here that the Bank of England while saying inflation will head back to target of 2% over the medium term they had in fact clearly shown elsewhere that they expect inlfation to exceed 4%. Our CPI inflation today is 3.2% and our RPI is 5.0%.

    Up until a week or so ago a government backed organisation had a great product which allowed you to track the RPI+1%. They have just taken this product away as they said they were taking investment from the banks who needed it. So now we only have derisory savings rates to choose from. This means in the near future I have to look for another product which will ‘protect’ me from inflation.

  4. Debt Vigilante

    There has been very few times throughout American History where deflation has occurred. With the deficit the way it is, I doubt we are currently heading into one of those periods. That being said, if I knew deflation was around the corner, I would do exactly what you suggested. I would postpone any spending possible. Anything that I was planning on buying would have to wait until deflation set in before I purchased. Its a no-brainer. Waiting on those purchases until deflation would be like giving yourself a raise.

  5. Hi Sam, I agree that deflation is unlikely. That said, the future is UNKNOWABLE so no one knows what is on the horizon. WRT to the market, why is it so high? Historically the market is higher with lower interest rates, after all, who wants to put their hard earned cash in a vehicle that pays 1-2% interest? The round up looks great, I’m off to read…. Cheers

    1. Tis a good point indeed on low interest rates spurring investors to put money to work in the market. Which is why I’m perplexed the bond market is also so strong… strongest it’s been in a long long while.

      IF we have deflation, 2% interest ain’t bad, and 4% interest for a long, long bond is even better!

  6. Hi Sam,

    Never say never.

    The trend in wages is deflationary, at least for a senior person (>200K per year basic salary plus bonuses) like me. If you disagree please let me know where I can find another high paying job!


    1. Never.

      There’s no chance in hell we are going to have persistent deflation. MAYBE for one quarter, but we will keep chugging alone just fine. There are actually plenty of 500K+ jobs. The financial services industry is hiring like gangbusters, just do a google search.

      The CEO at HP gets $28 million for sexual harassment, and Twitter found a new CFO. There is tons of money everywhere and it just keeps going up.

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