Deflation/Inflation – How to Prepare

Posted by Lorren on August 3, 2010

100 Trillion Reasons by LSDmeCom

As early as January 2008, I was talking about hyperinflation. I don’t know much about the Weimar Republic… I’ve been looking at books, but I’m not sure which would have the information I’m looking for. Many of the books focus on Hitler’s rise, but I’m more interested in how people lived. I once read a web site where gold was going for a trillion marks or more an ounce, but I can’t find that site any more.

The word of the day, however, is deflation. I’ve been hearing the word for about a month or two as I drive to church on Sunday mornings. I know that the government has been printing way too much money, so I’ve been preparing for hyperinflation. The truth is, we should be preparing for both.

So how do you prepare for both? You need to be in the best financial shape that you can be. Now, don’t tell me that you can’t… I’ve written before about my finances. I do realize that there are people in worse financial shape than me… homeless people, many illegal immigrants, many drug addicts, many alcoholics, and a few hard-working families that are down on their luck. My friends lived in a place for a while where people with income lower than ours lived; many of my friends’ neighbors were in those situations. We’re in a difficult situation because my husband, the breadwinner, is in college.

First comes deflation. This is where your loans are going to be super expensive. Stop using credit cards! Let’s say you bought a 16GB iPad today for $599 with your credit card. Credit cards are generally a ripoff anyway, in the best circumstances you’re going to pay way too much in interest for it, even with a slight bit of inflation. When deflation hits, that credit card bill will be harder to pay for. First, the iPad’s value will sink like a rock. Let’s say it halves in value, so it’s worth $300. Secondly, deflation causes your wages to fall. I’ve experienced that before: I once had an income which would amount to maybe $100k a year (I had free housing and utilities so it’s a little difficult to guage), and overnight our family started making about $30k. Bills that were once no sweat kept me up at night wondering how they were going to get paid. That $300 iPad that you still owe $550 on, with half your salary, won’t have easy payments any more.

Same thing comes for cars. Now, we do have a car payment at my house; I wish that we didn’t. We have one car that we bought about four years ago for $1400 cash; the door is falling apart, but it runs and it’s paid for. Our other car we have payments on. Fortunately, it’s 2/3 paid for, but if you ran out and bought a car on credit right now (let’s say you got that great new Chevy Volt), you might pay $35k after tax credits. Deflation kicks in, your car is eventually worth $20k; you still owe $34k on it, and suddenly you’re making half of what you used to (because you have to take a pay cut at your job). Not a pretty picture.

So to prepare for deflation, try to get out of debt. If you don’t have the money to buy something, don’t. Cash is worth a lot more during deflation, so saving is good, if you can manage it. If you have a car that runs, save your money until you can pay cash for one. The same goes true for buying a house. You might not be able to pay cash for one, but if you’re going to buy one, put a sizable down payment down.

But then inflation kicks in. The rules are a little bit different. If you knew how to time the bottom, you could get rich. Unfortunately, that’s very risky to do.

I once remember reading a story about a man who borrowed money to buy a herd of cattle in the period of the Weimar Republic. He paid off his debt with one of the cows after inflation set in. You could do this with gold if you could time it right. Unfortunately, most people who tried this would get killed by deflation.

However, if you can buy gold, silver, or junk silver, that’s one way to prepare for hyperinflation. While the dollar will lose value during hyperinflation, the actual value of gold will stay fairly constant. If you can buy a hamburger with the value of a junk silver coin today, you’ll be able to buy a hamburger with the value of a junk silver coin five years from now. Theoretically, the value of silver and gold should fall during deflation; however, there are plenty of people that know that hyperinflation is next, so I’m not sure if the value will go down. I cashed out my kids’ savings bonds a year ago and bought silver with the money; they’ve made about 25% profit in the last year. Gold has gone up about $50 an ounce since earlier this year as well. When hyperinflation kicks in, coins with actual value will still be worth something… that is, unless Obama outlaws the private ownership of gold. Then things like food will be worth something. You might want to stock up on food just in case.

No matter where you are financially, it’s time to get prepared. You don’t have to be George Soros to get in a better financial position. Pay off your debts, try to save a little, and don’t buy anything that you can’t afford unless it’s an absolute necessity.