Deflation? Hyperinflation? What Do I Do?

I absolutely love tuning into talk radio stations. It’s hucksterism at its most entertaining – the selling of fear is palpable and the line between content and commerical is so blurry I can’t tell if the host is on an economic rant or trying to sell me on a gold broker.

Regardless of whether you think such talk show hosts are the scourge of the earth or a vital source of speaking truth to power (I’m not in either camp, actually), there is one truth that you can take away from all of it: no one knows for sure what’s going to happen next in terms of the economy.

One can make a reasoned, rational case that we’re on the verge of a golden age because of emerging technological advances and the opening of new markets. One can make a reasoned, rational case that we’re on the verge of economic collapse that will come in the form of a deflationary spiral (lower prices lead to lower production which leads to fewer jobs which leads to lower prices…). One can make a reasoned, rational case that we’re on the verge of economic collapse that will come in the form of hyperinflation (prices escalating, the dollar dropping compared to other world currencies, etc.).

We just don’t know.

If you believe a boom time is coming, it probably makes sense to invest in stocks, particularly in technology and in emerging markets. Invest in things that will grow like crazy when things start to take off.

If you believe deflation is coming, it probably makes sense to start hoarding cash, because every dollar will increase in value. Buy CDs and keep your money in the highest-yield savings accounts you can find.

If you believe hyperinflation is coming, it probably makes sense to buy real physical assets like real estate and, yes, even precious metals. Buy things that will retain at least some significant inherent value regardless of what happens to the dollar and to the national economy.

The problem is, of course, that these avenues don’t really overlap. If you’re investing all of your money in cash, you’re missing out on other areas, for example.

Given the complete uncertainty of the future, what should a person do?

Diversify.

Do not put all your eggs in one basket, even if you believe disaster is just around the corner. This is true whether you’re investing for personal gain, investing for retirement, or simply deciding how to put together your personal budget for next month.

You can diversify your investing by having a little bit of this and a little bit of that. At retirement, you’re probably more concerned about protecting yourself against collapse than riding a possible financial rocket, so your concern would be more towards investing conservatively in cash and bonds and some real estate.

You can even diversify when you budget. How? You diversify whenever you toss some money towards an emergency fund. That way, whenever that disaster around the corner peeks out, you have the tools you need to handle it. You also diversify whenever you buy in bulk, because you’re effectively investing some of your money into long-term household resources at a bargain price.

The more diversification you have in your financial life, the more likely you are to be able to simply roll through anything that life can hand you – and the more likely you are to be able to take advantage of any great opportunities that come your way.

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  1. IASSOS says:

    I think there is some overlap. Gold works for either hyperinflation or deflation because of the “inherent” value. Certainly the price of gold will decrease in deflation, but I think that no value would be lost long run. That is, an ounce of gold would still buy the same goods after deflation/inflation as before. (The difficulty is in redeeming it.)

    I think that cash has a risk in a deflation scenario. What if the government calls in the old dollars and issues new ones? Or if they simply said to banks: for every ten dollars on deposit, you will now pay out one. I know this seems crazy, but who would have thought that banks would renegotiate mortgage terms?

  2. Michelle says:

    Gold has no “inherent” value, it’s a currency, same as the Dollar or Euro. Something only has inherent value if it fulfills a need on it’s own. Food has inherent value, it keeps you alive. A house has inherent value, it keeps you sheltered. Gold will do neither. You have to trade it for something with inherent value.

    Honestly, I think buying precious metals because “the end is near” is silly. If you are really that concerned about the collapse of society, store food and water, and learn how to do things for yourself. I know I am not trading my food storage for gold, and I doubt you’ll find anyone else willing to do it either. Heck, I’d almost rather have paper money, at least then I could burn it if it’s cold.

  3. George says:

    “If you believe deflation is coming, it probably makes sense to start hoarding cash, because every dollar will increase in value. Buy CDs and keep your money in the highest-yield savings accounts you can find.”

    Yes it makes sense to hoard cash, but CDs is not how I would do it as their yield is down. Instead, buy high-yielding stocks, MLPs, REITs, and royalty trusts with stop losses set very tight. You’ll easily get double the yield of a CD and with tight stop losses, you’ll have nearly the same security.

  4. George says:

    “If you believe hyperinflation is coming, it probably makes sense to buy real physical assets like real estate and, yes, even precious metals. Buy things that will retain at least some significant inherent value regardless of what happens to the dollar and to the national economy.”

    Since it’s tough for individuals to own much real estate without having a pile of debt, it makes more sense to own paper assets like REITs that invest in real estate for you. Nimble companies that can exercise lines of credit to expand their businesses are good bets, too. You don’t, however, want a company that’s already saddled with debt before the inflation hits as they may not be able to go further in debt.

  5. IASSOS says:

    @Michelle: Let me start by saying that I do not own any gold. And that I use it as merely the most prominent example of something generally recognized as a medium of exchange and store of value. It is portable, testable, and without religious prohibition as far as I know.

    I have read — somewhere! — that in 1776 an ounce of gold would buy a good quality man’s suit. And I think it would do so today, after 230 years of inflation, deflation, and going sideways.

    You can’t eat gold or grow corn on it, but it is useful as an intermediate exchange. If you have cabbages to barter, and I have vitamin pills, we can only reach a useful exchange if I want cabbage soup and you feel a need for B12; and even then the exchange rate may not be convenient for one or the other of us. But if you can turn the cabbage into dollars or rubles or gold; and if I can do likewise with the vitamins; then we have what the computer world calls an “interface”, that is, a means of speaking the same language to each other. Thus, I think gold is useful.

    And if I have to flee across the border or over the ocean, but manage to have the gold with me, the people on that other side will recognize what it is and be able — and probably willing — to provide goods, services, or their currency in exchange.

  6. almost there says:

    I was watching a show on Tru TV (Ventura) and people were banding together to buy old missle silos to covert into shelters for when society falls apart. I guess there is a big market in it. Instead of gold. fuel, alcohol, ammunition, smokes, TP and fem. products would be worth more to trade for things. I worked with a guy that believed such and has 4 gun safes, 1000 rounds for each caliber gun, stockpiles food and water and rotates the items out to keep using up the old first. For the survivalists out there don’t buy coins but buy baht necklaces.

  7. I agree with the author–diversify. I have a portfolio that is diversified, but is weighted heavily towards international investments. They seem to be weathering these times better than we are.

  8. lurker carl says:

    I suggest watching closely what happens to UK and EU, their economies are in worst condition than the US. Higher debt, lower industrial output, fewer natural resources.

    These cycles are nothing new, revisit your history lessons.

  9. deRuiter says:

    Economic diversity is a good thing! Paying off your house if you’re planning to stay a long time is a grand investment, because you have something of value. Having a few ounces of gold is security too. Gold can be used to bribe your way out of a collapsing country, it’s small and portable, everyone agrees it has value, and when you land in a new country, you can trade it in for currency or things of value. A lot of people in pre war Germany got away to safety with the help of their gold coins, gold jewelry, while those who had a paid off home, grand piano, paintings, beautioful rugs, gardens, livestock, and stayed because of their possessions, got herded into catttle cars and slaughtered. I think a stash of gold, a few ounces, can’t hurt! Economic collapse is ahead, in my opinion. Washington continues to print money which is fake, US treasuries are not all finding buyers, Greece is going into exonomic collapse, Germany has no economic growth, America has in reality 20% unemployment, but the administrations fiddles with facts to get the lower rate by not counting those who have been out of work so long they have given up and claiming government workers and censu workers are “real” jobs which they are not, they are jobs which produce nothing but higher taxes and help insure the coming collapse. We are about to experience an unprecidented wave of commercial property forclosures (commercial loans are renegotiated every 3-5 years) and the home forclosure bloodletting will continue as long as banks and Obama drag their feet and do not allow the inevitable, which is forclosure for all properties in jeopardy and resale of them at lower prices to people with a track record of paying loans, and the ability to do so.

  10. IASSOS says:

    My reading of this article did not lead me to think about survivalism, but rather about financial strategies when prices swing up or down. We have lots of experience with inflation in the United States. An easy example is gasoline. I remember well that it was 57 cents a gallon in 1978. (Because I had a fixation with the number 57 at the time . . .) And a new car is about ten times what it was when I was a teenager, say $2,000 then vs $20,000 now. But we have not had a collapse.

    You could also argue that we have had deflation recently. Gasoline was $4 a gallon a couple of years ago, but is about $2.60 now. Houses are down, also. Some in my community are literally half of the former going price.

    So, what should I have done? Gasoline deflation has not been harmful to me personally since it did not cause my income to decrease along with it. Housing deflation caused me some grief since it weakened some securities that I owned. So I should not have owned those securities. Since I kept the same house throughout, I was not affected by its change in price.

    What about inflation? Before I retired, my income kept up with inflation quite well. Now, however, this is a challenge for me. Stocks or stock mutual funds appear to be the way to run that race.

    The conundrum is clear.

  11. Great post and comments Trent. I learned early to diversify in the music business. I started out as a booking agent, moved to booking and promotion, started incorporating writing skills into promo so I could write bios and blurbs. Recently I released three packages incorporating traditional media with social media. Diversification in business is the only way I’ve managed to hang on to the financial rollercoaster that is working for oneself. Which I refer to as self-sustaining!

  12. Michelle says:

    Gold has value because people give it value. Which is the same as paper money. On it’s own, gold does nothing and serves no purpose. It’s a shiny metal, the same way the paper money is just paper. I would personally rather have food and shelter than metal. Food will ALWAYS have value. Shelter will always have value. People could decide that gold has no value. That’s the thing about currency, it’s only valuable as long as someone says it is. My point is, if you really and truly believe that the collapse of society is near, then it is much better to store things that have inherent value then something that has to be given value.

  13. David says:

    If you believe that a point will be reached at which government has so little control that the currency no longer has any value, I suggest you invest now in a gun and several rounds of ammunition. Nothing else is likely to do you much good – having vast quantities of food will merely ensure that you are shot for it by the people who follow the advice I have just given.

  14. If you believe inflation is coming, I believe you are going to be wrong. But the fraudulent fractional reserve system we are operating under does some crazy things.

  15. Also gold does have inherent value. It is used in Jewelry Making, computers, electronics, medical, aerospace, glassmaking, & much more.

  16. Evita says:

    Hummmm….. inflation, maybe, but is hyperinflation likely? are we likely to see inflation growing by double digits every month?
    Or did I misunderstand you again?

  17. Brent says:

    I’ve seen a decent number of predictions for collapses of most safe havens. Gold, Another real estate drop, that interest rates have to go up, and that the dollar will collapse.
    Just about the only sure bets are stocking up when prices are good on the things everyone uses, investing in yourself, and eliminating debt.

  18. Art says:

    Survival based on the worst case situation.
    1. Buy 2 guns and ammo; a rifle (for hunting) a pistol for defense.
    2.Have a 1 year non-perishable food supply. water, beans, rice, grains,canned goods.
    3.Petrol to run auto, generator.
    4. Energy source: solar,wind.
    5. Get ready to move back to the farm and survive
    like your ancestors did 200 years ago.
    6.Have a nice day.:>)

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