Deflation and its effects explained

Just ran into an excellent, because brief and to the point, explanation of the major effects of deflation. Hint: it’s not as bad as some people think. Unlike inflation, it does reward savers.

The kernel and key is here near the bottom of the long piece in Forbes, which leads with this: “Until August 15, 1971, wealth was tallied in units of a real and natural thing, gold. It measured out the world’s other real things, its resources and its output.”

Key sentences: “Deflation takes prices down. Even a zero interest rate gives them  [bond buyers] a positive return. And it isn’t even taxable.

And finally, when Pres. Nixon cut the dollar loose from gold, although we had paper money, it was tied to gold and silver, not to itself. “Paper money was left to run wild. Ben Bernanke famously announced how it worked in a 2002 speech, entitled Deflation: Making Sure it Doesn’t Happen Here. Now we know why.”

N.B. IFO remembers that day in August vividly, as do many Libertarians. That was the time Nixon also imposed wage and price controls, famously unsuccessful, and declared, “We are all Keynesians now.”

So, now as we watch prices of some commodities, residential real estate, computers and stocks decline, cash has beome valuable again. Problem? Most of us don’t have any spare cash right now, so we are retrenching, cutting back and, if possible, adding to savings.


About InvestingforOne

I've been investing in various assets by myself using a discount broker for many years. Over that time, I've developed some theories that others might find useful. Plus, there is more to investing than money. Time, talent, work, friends, family all go into developing a good and satisfactory strategy.
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