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Betting on deflation?—very bad idea

Posted by John T. Reed on

  • A Facebook reader of mine said: some of my friends are betting on deflation. Mainly because we are the reserve currency. I don’t disagree with you but I think this still can take decades to play out? Or when do you think this will actually happen?
    I dislike the question. To me it sounds like, “I can ignore the risk of hyperinflation or depression because it is not imminent, right?”
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    The first sentence of my book How to Protect Your Life Savings From Hyperinflation & Depression is “It can happen tomorrow.”
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    With regard to your “friends,“ “betting” is crazy. My book is not about betting. The title is How to Protect Your Life Savings & Depression.
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    Depression is the more well-known name for deflation.
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    “Betting on deflation” means you get obliterated like a roofer in Hiroshima on the day they dropped the atomic bond if we get inflation instead. The deflation “bet” assets are dollar-denominated cash and bonds and so on.
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    “Betting” on inflation is absolutely NOT my book’s approach. My book takes an INSURANCE and HEDGING approach.
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    Having said all that, I will now give your idiot friends a solution that might appeal to their navel-of-a-gnat sized brains:
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    But US pennies and nickels at your local bank. If we have deflation, the fact that the words “one cent” and “five cents” are engraved on them means they will be hailed as deflation-protecting geniuses.
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    In DEflation, the purchasing power of the dollar goes up. for example, a candy bar now costing $1.25 (25 nickels) would drop in cost to say 50¢. In other words, you suddenly get two and a half  candy bars for your 25 nickels.
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    But if we have INflation, the melt value of the pennies and nickels will go up. You can check it on coinflation.com. If inflation lasts long enough—about a month—the fact that the metal in those could went up in value will be understood meaning you have been protected against inflation, too.
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    Assets that protect you from BOTH inflation and deflation are rare—like only pennies and nickels.
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    But many assets are two-way indexed, like your free-and-clear personal residence. In deflation, its dollar value will go down, but you still have a place to live. In inflation, the dollar value of your house will rise, although its purchasing power will generally be unchanged, and, again, you still have a place to live.
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    If your idiot friends are really betting on deflation, they own cash, American corporate or US bonds, CDs, annuities including social security. And if you read history, like the hyperinflation in Germany in the early 1920s, the people who got hurt the most, obliterated financially, was the people who owned German marks, mark-denominated bonds, and mark-denominated pensions and annuities.
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    THAT is “betting on deflation” and it is probably the dumbest thing you could do today. My book is not about betting on inflation, it is about protecting yourself against BOTH inflation and deflation and there are 320 pages of way to do that. I mentioned one above—pennies and nickels. Others are things like non-recourse mortgages, advance purchase of food and other consumables, and so on.

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