What's all the fuss about over inflation? Moreover, what or when have we ever had DE-flation? If it's the opposite of inflation -- count me in! Right?
We've all heard about inflation before. It's that nasty word that gets used to describe how our money's not worth the same today as it was once before, or how our paycheck doesn't buy what it used to. We've all probably spent time yawning around the family gathering listening to the old people rant about when gas used to be 50 cents a gallon or a loaf a bread a quarter. So what…that's just the way it is - right?
It's true that as a general rule, things cost more as time goes by. This is actually a good thing - as long as it doesn't happen too fast. Why? Because we don't want things to cost less at a later time then right now (deflation), otherwise wouldn't we wait to buy it later for less? If we all wait around to see if things will come down in price - what do you think happens to people trying to sell stuff? Sales go down, known as revenue, and revenue is the fuel of our economy. If there's no fuel, our economy stalls, or stops growing, and that is what we call a recession. Then it becomes a vicious cycle, where the more things comes down in price, the more people stop buying to wait for things to fall further. Sounds familiar right? Maybe our home values lately…..?
Our economic history is filled with examples of both of these economic cycles. Normally, a modest inflationary economy is what is desired, but sometimes hard to control. When our economy gets really hot, and jobs are plentiful, money begins to grow on trees, and inflation can grow too high. In the 80's we had a number of years of double digit inflation - known as hyper-inflation. When this happens, things go up in price too fast, and people begin to hoard things à buying up supplies just to have for a rainy day. Gold can be great commodity to own in this environment, because gold tends to hold its value, and it doesn't become obsolete. Cash on the other hand loses value every day in this environment….so owning something (anything) is normally better than owning cash in this environment.
The opposite of hyper-inflation is of course hyper-deflation. Now nobody wants anything, because it's all going to cost less tomorrow. The problem is when the things that were previously bought with leverage (e.g. loans) lose value, but the loan doesn't go down with it and folks begin to default. In turn banks or businesses can't collect, and they default to other banks that they may owe money too, and then the government becomes the bank of last resort……does this sound familiar? Maybe 2008/09? Maybe Europe right now?
So what type of environment are we in today? Is it inflationary? Some might say yes, because gas, food, and clothing all seem to be creeping higher in price - right? Certainly gold has been on a long run. Yet, some might think deflationary, because we're still waiting on our home values to go back up again, and jobs certainly aren't very plentiful. So why does it matter? If we kind of muddle our way back to a normal inflationary economy , it probably doesn't really matter. Yet, if something causes us to swing to either of these HYPER states, then watch out, because then the environment quickly can swing to "Cash is King" or "Gold your best Friend", but not likely both of these at the same time.
So don't get hyper, but do talk to your financial advisor if any of this is concerning to your situation.
Pete Thoresen | Financial Advisor | Focus Financial Network, Inc.
1000 Shelard Parkway, Suite 300 | Minneapolis, MN 55426 | 952-225-0344 direct | 952-591-9770 main
Securities offered through Royal Alliance Associates, Inc., member FINRA/SIPC. Insurance and investment advisory services offered through Focus Financial Network, Inc., a registered investment advisor not affiliated with Royal Alliance Associates, Inc.
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