Preparations for Deflationary Spiral

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JAG's picture
JAG
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Joined: Oct 26 2008
Posts: 2492
Preparations for Deflationary Spiral

Hi Everyone,

I wanted to pilfer the Martenson Forum Braintrust for ideas on how to best prepare for the possibility of a deflationary spiral. There has been a great deal of discussion on preparing for a onslaught of inflation on this forum (and across the finacial community), and while this seems like a logical outcome, I think it might be prudent to prepare for the unexpected outcome as well.

In regard to personal preparations, many elements would remain the same for both economic outcomes (mainly a more self-reliant lifestyle). The only difference that I see is that you might want to delay some purchases in hopes of lower prices in a deflationary spiral.

In regard to PMs, they are both a commodity and a currency, so I'm not sure what to think here in the short-term. If the dollar rises in value, as it should during a deflationary spiral, then gold should probably drop in price. There is also evidence that during times of economic contraction gold does poorly, as we saw during the economic contraction in the fall of 08. I guess my question is, will there be a better time in the future to buy gold?

I read about the strategy of buying TIPS to protect against both inflation and deflation. The deflation side of the theory is that if you hold the bonds to expiration, and there was no inflation, you would get your principle back and it would be worth more because of the rise in dollar value over the term of the bond. This sounds like an excellent option, except that can you really trust the government during a deflationary spiral to pay you? 

Some people state that high-grade bonds are a good investment in a deflationary spiral. But again, will the bond issuer be there to pay you at the end of the bond's term?

Does anyone know of any other options (besides hoarding cash) ? 

Because I can't possibly know the future, I feel I need to prepare for both economic outcomes to the best of my ability. Thank you for your input.

strabes's picture
strabes
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Posts: 1032
Re: Preparations for Deflationary Spiral

yes there will be a better time to buy gold in deflation

for other cash vehicles, I'm personally going with short-term T-bills and continually recycling them rather than going with long bonds.  I like the added freedom, and they're even lower risk than long bonds. 

but in terms of bonds, yes govt bonds are the best...not TIPS...regular nominal bonds. 

no, govt will not default on those unless it has no other option.  avoiding default on Treasuries is THE KEY to avoiding the end of the world scenario.  govt will end everything else (pensions, soc sec, medicare/medicaid, etc) before it stops paying bill/note/bondholders.   

high grade bonds other than Treasuries are a higher risk because you don't know if that company will exist 10 years from now.  you'll get paid an extra risk premium for that, but deflation is not a time (in my view) to play with risk. 

 

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Preparations for Deflationary Spiral

Jeff, just a quick followup that I also moved some cash offshore because the US govt is literally insane...it's like a pathological narcissist who is facing the destruction of his false facade...manic rage is the result of facing that.  who knows what the govt will do.  another way of looking at it is like a cornered wild animal...we have no clue how it's going to react but it's going to hurt badly.  I think it's possible (low probability) that any/all savings in the US could disappear (except stuff; hard assets).  so putting some cash in switzerland is a small insurance policy.  

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kemosavvy
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Posts: 254
Re: Preparations for Deflationary Spiral

I see so much talk on these boards and in the media about a hyperinflationary environment, but at the very least i don't see a return to inflation happening until at least April 2010 (based on a historical trend of 2.5 year deflationary cycles). one indicator i am watching is the m1 money multiplier http://research.stlouisfed.org/fred2/fredgraph?s[1][id]=MULT (if i knew how to post the chart i would, i'm willing to learn) vs. the m1 money supply http://research.stlouisfed.org/fred2/series/M1?cid=25.

the m1 money mulitplier shows how many times a dollar circulates before it is used to pay a debt, right now it's an upside down hockey stick. the m1 money multiplier under 1.00 is a reeeally bad sign. people are paying off debt faster than they are spending it on goods and/or banks are keeping the money to recapitalize.

the m1 money supply is that scary hockey stick chart of massive dollar printing. this money printing has everyone a little frightened and is sparking hyperinflationary fears.

 but.... the money printing is being offset by banks using the money to recapitalize and when it does go into circulation it is quickly being soaked up by payments on debt (thus destroyed). the thing to watch is when the money multiplier starts accelerating, that's when the fed has got to suddenly reverse course. that's when i will be worried about inflation because i've lost faith in the feds ability to make all the excess money disappear, in fact, i've lost faith in the fed doing anything correctly.

steve

switters's picture
switters
Status: Platinum Member (Offline)
Joined: Jul 19 2008
Posts: 744
Re: Preparations for Deflationary Spiral

Haven't we been experiencing a deflationary spiral?  And hasn't gold held up better than anything other than the U.S. dollar during this period?

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: Preparations for Deflationary Spiral
JAG wrote:

Hi Everyone,

I wanted to pilfer the Martenson Forum Braintrust for ideas on how to best prepare for the possibility of a deflationary spiral. There has been a great deal of discussion on preparing for a onslaught of inflation on this forum (and across the finacial community), and while this seems like a logical outcome, I think it might be prudent to prepare for the unexpected outcome as well.

In regard to personal preparations, many elements would remain the same for both economic outcomes (mainly a more self-reliant lifestyle). The only difference that I see is that you might want to delay some purchases in hopes of lower prices in a deflationary spiral.

The aggreate of such behavior is the acceleration of the deflationary spiral.

JAG wrote:

In regard to PMs, they are both a commodity and a currency, so I'm not sure what to think here in the short-term. If the dollar rises in value, as it should during a deflationary spiral, then gold should probably drop in price. There is also evidence that during times of economic contraction gold does poorly, as we saw during the economic contraction in the fall of 08. I guess my question is, will there be a better time in the future to buy gold?

My guess is, yes there will be (or there was) a better time to buy gold. To make this work, you have to buy gold when demand is low and sell gold when demand is high.

JAG wrote:

I read about the strategy of buying TIPS to protect against both inflation and deflation. The deflation side of the theory is that if you hold the bonds to expiration, and there was no inflation, you would get your principle back and it would be worth more because of the rise in dollar value over the term of the bond. This sounds like an excellent option, except that can you really trust the government during a deflationary spiral to pay you?

Don't count on them to help you. Self-reliance pays.

JAG wrote:

Some people state that high-grade bonds are a good investment in a deflationary spiral. But again, will the bond issuer be there to pay you at the end of the bond's term?

Don't count on them to help you. Self-reliance pays.

JAG wrote:

Does anyone know of any other options (besides hoarding cash)

Our current options simply do not work. What needs to happen is an increase of personal income relative to savings deposits.

JAG wrote:

Because I can't possibly know the future, I feel I need to prepare for both economic outcomes to the best of my ability. Thank you for your input.

Remain healthy :), stay out of debt, continue working, and don't be stingy about using up your savings (other workers will need it).

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: Preparations for Deflationary Spiral
kemosavvy wrote:

I see so much talk on these boards and in the media about a hyperinflationary environment, but at the very least i don't see a return to inflation happening until at least April 2010 (based on a historical trend of 2.5 year deflationary cycles). one indicator i am watching is the m1 money multiplier http://research.stlouisfed.org/fred2/fredgraph?s[1][id]=MULT (if i knew how to post the chart i would, i'm willing to learn) vs. the m1 money supply http://research.stlouisfed.org/fred2/series/M1?cid=25.

the m1 money mulitplier shows how many times a dollar circulates before it is used to pay a debt, right now it's an upside down hockey stick. the m1 money multiplier under 1.00 is a reeeally bad sign. people are paying off debt faster than they are spending it on goods and/or banks are keeping the money to recapitalize.

the m1 money supply is that scary hockey stick chart of massive dollar printing. this money printing has everyone a little frightened and is sparking hyperinflationary fears.

but.... the money printing is being offset by banks using the money to recapitalize and when it does go into circulation it is quickly being soaked up by payments on debt (thus destroyed). the thing to watch is when the money multiplier starts accelerating, that's when the fed has got to suddenly reverse course. that's when i will be worried about inflation because i've lost faith in the feds ability to make all the excess money disappear, in fact, i've lost faith in the fed doing anything correctly.

steve

When I was a kid who recieve "Savings Bonds" as a present, I believed that my savings could continually grow at 5% a year and that I would someday have lots of money to spend.

However, I am no longer just a "kid". I realize that if everyone was to benefit from accumulating savings this way, then that would require a increase in the M1 money supply. The only way you can do that in our society is to expand the M1 money supply. This is largely done by the expansion of the credit markets.

When you pay money to the bank, it does not become automatically destroyed. Some of that money is destroyed behind the scenes, but overall the bank keeps the money as equity and that is how it can make profit (money is transfered from M1 to higher levels). The bankers are likely to profit as long as the amount of money paid for loans exceeds the money provided through loans.

This condition has ceased to be the case for many banks, and some of the major banks are now spending millions in attempt to lobby government for money. It is very clear to me that in the status quo we have, this money could not have been provided to the banks any other way, because in the current system, the only source of growth and profit for banks is the central bank itself. As long as private, profit-seeking banks exist, this insatiable thirst for money will not be satisfied. The banks are like children in an eagle nest, waiting for their parents (government and central bank) to feed them and keep them warm.

kemosavvy's picture
kemosavvy
Status: Martenson Brigade Member (Offline)
Joined: Oct 13 2008
Posts: 254
Re: Preparations for Deflationary Spiral

maybe i oversimplified my statement by saying that money was 'destroyed'.

when debt is paid back the money returns to the bank and they can reloan the money, this is the scenario in good times. in tough times like now the banks are taking on such massive losses that the money is used to recapitalize their reserve-to-loan ratio. to make the matters worse banks are also bearish on making new loans. this is how money is being 'destroyed' right now, or put more accurately taken out of circulation.

the money machine is broken.

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