How to prepare for deflation?

[kimchi]

Inflation is the current buzz-word with the falling $US, rising commodity prices and the prices of basic essentials.

There is one huge part of the economy (in the US) experiencing deflation: - property. The S&P/Case-Shiller home price index tracking 10 regions recently posted its steepest decline in 16 years - 4.5%, this contrasts with prices rising 20% year over year back in 2004.

The media and economists tend to worry about what has happened in the past. There are financial indicators which fade whatever appears on the front pages of national magazines and there is a case for fading predictions for continuing inflation.

As the gentlement on the politics forum so eloquently pointed out recently, my understanding of macroeconomics is probably fatefully flawed. I am therefore wondering how you would best position yourself to prepare for a deflationary environment.

If returns are related to risk, and a deflationary environment produces very low (or zero) returns, then maybe this would mean that risk is lower. Japan has been dipping in and out of deflation for the last decade or so and people have been depositing huge sums into their (soon to be privitised) postal service bank. Their rate of retun cannot be zero, but has often be close to it.

I've heard that in times of deflation, cash is king. But is this because the negative effects of inflation eating away at your savings become reversed, and so stuffing cash into your mattress becomes +EV? If the expectation of future prices is lower (eg- as in technology today) then there is a disincentive for people to spend their money, and thus save it.

So, whats the best way to prepare for a deflationary economic environement?

[ilikeaces86_]

Cash is always king.

[Ray Zee]

lock in some non callable bonds at a good rate.
but dont count on deflation as the fed acts quickly nowadays and may not let it happen so easily as in the past.

id worry more about infaltion than defaltion in this environment. but who knows.

[DcifrThs]

i wouldn't worry aobut deflation so much in the USA/UK etc.

Japan had such a poor experience (and deflationary experience) in part because the banks with poor debt were kept alive via govt funds and monetary efforts were not fully engaged in to increase the supply of money. citizens were highly affected and, as you mentioned, putmoney in lowly returning "safe" places vs. the "dangerous" places like real estate and equities. savings were always a huge part of japanese culture, but less so duringthe booming 80s. when it crashed, savings became even bigger and spending fell huge.

anyways, the fed will do everything in its power to prevent deflation. more than the BoJ did and lessons were learned from their experience.

bottom line, deflation isn't something i think you should spend a lot of effort thinking about / planning for.

Barron

[jtollison78]

I ran back and forth between deflation worries and inflation worries for a long time. I think it's incredibly hard to tell, but I've been leaning toward believing the inflationists recently. I think the government has enough vectors to put money into play that we don't see the pushing on a string problem and there is no debt-default drive for deflation. But this is a very rough guess.

As for deflation defense, Gold does well during a deflation. Kindleberger covered this briefly in Mania's, Panic's, and Crashes: a History of Financial Crisis, early in Ch13. He says that between the late 20s and late 30s, gold gained 75% in real terms vs most currencies. I have read elsewhere that historically gold's moves correlate better with deflation than inflation. Unfortunately, I can't provide a reference or link off the top of my head.

Of course, government bonds are also a reasonable move vs deflation.

John

[adios]

My take on the U.S. economy for the long run is that deflation is not that much of a concern. As far as home prices we're talking about some places where prices have gone down in a very short time period after a huge runup. If you took the price of a home in 1990 in these areas and compared them to today's prices you'd wouldn't see anything that remotely resembled deflation. That fact of the matter is that the cost of building a home has gone up substantially. Building materials and labor costs have increased not decreased. This explains why real estate prices should be viewed on a local basis. More people want to live in San Diego than Detroit so real estate price metrics such as cost per square foot are higher in San Diego than Detroit generally speaking for the same type of property. The cost of building a home is not that much different between the two, certainly not enough to explain the difference in price.

[joedot]

Cash is not king. Cash is crap. It has no intrinsic value and is backed by nothing. The fed is wrecking the u.s dollar. All fiat currencies end up at zero unless they are revalued. Gold looks good for so many reasons right now. Worried about deflation, gold goes up. Worried about recession, fed cutting rates, gold goes up. Worried about inflation and continuing decline of the dollar, gold is a safe haven. The chinese have TONS of U.S dollars. Think they want to sit there and watch that asset erode daily? No, they dumping u.s dollars and buying metals. Demand is what is driving gold and other precious metals to highs. Gold would have to go to 2500 in inflation adjusted prices to reach the high it hit in 1980. This is the 3rd inning for gold. Buy it, get rid of worthless u.s dollars.

[jtollison78]

I don't like putting everything in gold though. After 30 some odd years of running the entire world on fiat money, the bnkers might be thinking it's time to get back to a gold standard. I'm concerned enough about gold confiscation that I want to keep options open.

[DcifrThs]

[ QUOTE ]
Cash is not king. Cash is crap. It has no intrinsic value and is backed by nothing. The fed is wrecking the u.s dollar. All fiat currencies end up at zero unless they are revalued. Gold looks good for so many reasons right now. Worried about deflation, gold goes up. Worried about recession, fed cutting rates, gold goes up. Worried about inflation and continuing decline of the dollar, gold is a safe haven. The chinese have TONS of U.S dollars. Think they want to sit there and watch that asset erode daily? No, they dumping u.s dollars and buying metals. Demand is what is driving gold and other precious metals to highs. Gold would have to go to 1803.91 in inflation adjusted prices to reach the high it hit in 1980. This is the 3rd inning for gold. Buy it, get rid of worthless u.s dollars.

[/ QUOTE ]

FYP

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
Cash is not king. Cash is crap. It has no intrinsic value and is backed by nothing. The fed is wrecking the u.s dollar. All fiat currencies end up at zero unless they are revalued. Gold looks good for so many reasons right now. Worried about deflation, gold goes up. Worried about recession, fed cutting rates, gold goes up. Worried about inflation and continuing decline of the dollar, gold is a safe haven. The chinese have TONS of U.S dollars. Think they want to sit there and watch that asset erode daily? No, they dumping u.s dollars and buying metals. Demand is what is driving gold and other precious metals to highs. Gold would have to go to 2271.59 in inflation adjusted prices to reach the high it hit in 1980. This is the 3rd inning for gold. Buy it, get rid of worthless u.s dollars.

[/ QUOTE ]

FYP

[/ QUOTE ]

FMP...monthly data suck. daily nominal high for gold was 850.