Deflation or Inflation, which is Better? Coming soon?

by Wes Bridel on March 12, 2010

in Stewardship

Deflation or Inflation?  We mentioned we’re holding an event on Tuesday to prepare you for either.   Let’s begin with Deflation.  What is a deflationary depression?  What does it feel like?  How will it affect you?  Unless you’re around 90, you and I have never suffered through really difficult times.  But our country has seen a deflationary depression before.  We call it…the Great Depression.  You’re much more likely to be old enough to remember significant inflation.  So let’s talk about just what could happen because the more you understand what’s ahead, the better you can prepare!
Deflation simply means that the money supply is tightening.  There’s a whole lot less money everywhere.  This means that assets of most kinds are dropping significantly in value.  Cash is king because so few people have cash in a deflation.

The stock market falls.  Real estate values drop.  Everything is just worth less.  Because companies struggle to make a profit in times like this, many will go out of business and therefore have to lay people off.  Many others will simply have to lay people off in order to tighten their belts and stay in business.  So… many, many people lose their jobs and have no means to pay their bills.  Money is scarce.

Many bond holders will be hurt in such a deflationary depression too because companies that go out of business will be sold off piecemeal in this no money environment.  Instead of the principle plus interest investors are expecting, they will only receive the part of their principle that is left when all the company assets are sold off.  Of course, this is better than the big fat nothing that the stock holders will receive.  On the other hand, bonds of solid companies which are built to weather the storm should be ok in this environment (which is totally the opposite of an inflation environment which we’ll discuss soon.)

What do you think of when you remember stories of the Great Depression?  Soup kitchen lines?  Dust bowls?  Tent cities?  Money is scarce in a deflationary depression.  If such a time is coming, you will look back at how you used to waste money and wish you had these moments back.  You will look around your home and see items that you know you could have sold today for a decent amount of money but are in this new deflationary depression environment…worth very little.

To learn much more about this subject, if you’re in Austin come to our free event this Tuesday by signing up here.  If you can’t make it, sign up for our newsletter here where we offer free videos about the times that we are in.

This post is Part 2 in the series Inflation or Deflation. To continue with this series, click on Pt 3. To read the rest of this series, please read Pt 1.

Photo credit: Tempter of Fate

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