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Protect yourself from both inflation and deflation

Posted by John Reed on

“Quantitative easing” in a number of G-20 countries has metastasized into negative interest rates in eight countries. And U.S. Fed chair Janet Yellen has recently said she may urge the Fed to go to negative interest rates.

During deflation, people have a great incentive to save and postpone purchases because prices are falling. Negative interest rates are an anti-saving tactic—an artificial way to make your currency-denominated savings lose purchasing power if there is not enough inflation to accomplish that.

This is a complex subject that I cover in detail in my book How To Protect Your Life Savings from Hyperinflation and Depression, 2nd edition. Here I will just tell you about two approaches to stimulate your thinking.How to Protect Your Life Savings from Hyperinflation & Depression, 2nd edition book

Nickels and pennies

 First, a coin with a high ratio of melt value to face value is rare asset that protects you from both inflation or deflation. In inflation, the melt value rises with inflation because the metal in the coin is a hard asset which is good in inflation. If there is deflation, the melt value will decline, but you don’t care because the value of the coin never can fall below the face value.

Are there any such coins on earth at present? Yes, the U.S penny and nickel. Check it out at

You can win but you can’t lose

Any higher value assets that protect you from both inflation and deflation? Actually, I can do better than than just protect you. Here is a way to make out like a bandit during inflation, but not lose any money during deflation

Own a personal residence with a high loan-to-value ratio mortgage, preferably non-recourse. That means the lender can only take the property in the even of default, not go after your other assets or income. But you may not need that.

Bankruptcy-exemption planning

All states have a list of assets that are exempt from creditors in bankruptcy. Many states have homestead exemptions that are extremely generous, or at least generous enough to exceed your current home equity. For example, here in CA, the exemption for a married senior is $175,000. So no matter what in bankruptcy, if you have $175,000 in equity in your personal residence, you get to keep it if you go bankrupt.

In some states, most famously FL and TX, the exemption is stated in acreage, not money, so you can keep millions in equity in bankruptcy. So owning a leveraged home in such a state lets you profit from inflation if it occurs, and if there is deflation, you at least get to keep your equity.

In short, there are many low-cost, low risk smart ways to protect yourself from inflation or deflation or both.

Low probability is not a risk-management technique

Don’t ask me how likely inflation or deflation are at this time. That’s you looking for an excuse to ignore the risk. Treat it the same way you treat the risk of your house burning down. You have a one-year fire insurance policy on your home not because you are convinced it will burn down in the next year, but because it could burn down, it would hurt you financially if it did, and it is easy to protect yourself.

There is no insurance policy for inflation or deflation. But simply owning a mortgaged home in a state with an adequate bankruptcy exemption is lower risk and lower cost than an insurance policy, and it more than gets the job done.

Smart. Easy.

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