Is this: Inflation or Deflation?


The biggest question facing investors in this new age of centrally planned economies is this: inflation or deflation?

That sounds like a mind numbingly boring idea. So let’s put it another way.

Right now, the world’s policy makers are walking a tightrope. On the one side is a plunge into inflation. On the other deflation. The dramatic part about this tightrope is that it isn’t flat. It’s leading higher and higher. The further we go along the wire, the more dangerous a fall becomes.

If we get severe deflation, the entire monetary system of the world could collapse. Stock markets will crash, banks will fail, and paper and electronic wealth will disappear. It only gets worse. Without banks, supermarkets wouldn’t be able to restock inventory, petrol won’t be trucked to petrol stations and Tasmania would become a desirable place to live.

‘Inflation’ means a world just as chaotic, but in a different way. Prices would rise so fast that restaurateurs have to reprint new menus each week. Your spouse would rush down to the supermarket as soon as you’re paid to try and buy things at reasonable prices. Your entire investment portfolio would double, but only be worth half.

Now the question of inflation or deflation really means something, right?

But could things really get that bad? The answer to that question is yes, depending on how far we let central bankers and governments go along the tightrope. Back when your editor used to teach tightrope walking, we never got very far at all. In fact falling off elegantly was our speciality.

So in that spirit, how do you fall off a monetary tightrope without wiping out your wealth? How do you secure yourself from both an inflationary and a deflationary drop?

Get Real

The only kind of wealth that can survive both inflation and deflation is real tangible wealth. Real stuff has the advantage of being real (believe it or not). Its cash price can go up, down and all over the place without changing what it is. So, deflation or inflation, it doesn’t change.

Money is just a measurement. Well, it’s actually much more. It’s a unified medium of exchange allowing division of labour and solving the double coincidence of wants. But when it comes to investing, it’s important to realise that money is just a measurement.

If the price of a porkbelly on the Chicago Mercantile Exchange (CME) goes up 10%, it’s still just a porkbelly. What’s really changed in that scenario — the value of the porkbelly or the value of money?

You might answer that the value of the porkbelly has gone up, as you can sell it and get 10% more wheat bushels for your money. But what if you really want porkbelly? Hasn’t money then lost 10% of its value in your eyes?

Of course, porkbelly prices might fall 10% instead. Your money would be worth 10% more in terms of porkbellies, but 10% less in terms of everything else.

Now you probably don’t want any porkbellies from the CME (they come in lots of 18 tonnes). But if you can find things you do want, what would the effect of investing in them be? Would you withstand both inflation or deflation? Yes, because the value of your money would change, but the value of your real stuff wouldn’t.

Of course, you could end up selling the real assets you decide to invest in. Some of them tend to rise in real value over time. The word ‘real’ is crucial in that context. The value of a banana can increase even if its price falls. That’s because the prices of other items can fall faster, leaving you better off.

But porkbellies and bananas have a fairly poor investment history. Incidentally, bananas have outperformed the stock market though. The Dow Jones Industrial Average used to be worth more than double the amount of bananas it is today. In other words, the prices of shares have lagged well behind the price of a tonne of bananas.

What other real investments might there be for you to protect yourself from inflation and deflation at the same time?

Real Investments

The March issue of The Money for Life Letter featured investing in wine. We can’t reveal exactly how, but it involved a time travel discount. You can find out more here.

Gardens are another opportunity. Fruit trees, vegetables and herbs can save you big dollars in the long run. Not to mention improving your lifestyle and health. Some families make a living by charging other people to pick their strawberry fields. How’s that for a life? All you do is own a real asset — strawberry plants — and other people pay you to pick and eat them.

Energy is a surprising opportunity to make a real investment. Solar panels and solar hot water systems prove their value by saving you money. In Europe, wood is the number 1 source of renewable energy. In Germany, 38% of non-fossil fuel consumption comes from burning it.

To be clear, power stations in Europe burn wood pellets and saw dust to generate electricity. Power companies just plant as many trees as they burn to offset the pollution. Because of technology, the process of generating power can actually reduce the amount of carbon in the air! All you have to do is plant more trees than you burn.

Why not use the remarkable technological breakthrough of burning wood to your advantage and install a fireplace? It could cut your heating bill in half.

All these investments in your life are inflation and deflation proof because they are real. They can’t be ruined by central bankers or stolen by bankrupt financial institutions. If you definancialise part of your wealth, you can watch the tightrope act safely from the ground below.

Nickolai Hubble.
The Daily Reckoning Weekend Edition

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About the author: having escaped from academia, Nick decided to drop his tights (the required attire of a trapeze artist) and join Port Phillip Publishing. Instead of telling everyone about the Daily Reckoning, he now spends his time writing for the weekend edition.

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Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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4 Comments on "Is this: Inflation or Deflation?"

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Rick W
Rick W
3 years 6 months ago
I agree with the essence of your argument but you have not thought through the consequences. If everyone is producing for themselves what they consume then the GDP measurable by government will take a massive hit. Government tax revenues will fall and they will need to reduce costs (never happen) or develop new taxes. Hence your statement: “All these investments in your life are inflation and deflation proof because they are real. They can’t be ruined by central bankers or stolen by bankrupt financial institutions. If you definancialise part of your wealth, you can watch the tightrope act safely from… Read more »
slewie the pi-rat
slewie the pi-rat
3 years 6 months ago

there is something elegant about a writer who puts the dumbest, most boring title on his work.

so many will miss this b/c of the title that it’s wonderful!
click-repellant! VERY pi-ratical! L0L!

have we reached the point where economics is so mind-numbing, the pundits don’t even want us reading about it?
dear reader: go do something else so we can enjoy our unemployment checks.

3 years 5 months ago

This is liquidity. Step left to deflation or right to inflation. Keep the faith (in terror) brother!

3 years 5 months ago

Inflation and deflation are both maintaining this faith market/matrix. Reaping what the poor have sown. We can have faith in the truth we find within or adopt a collective truth where there is nothing to fear..ahhhh….except everything including what’s nailed down is stolen.

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