Do you know what the differences are between the economic terms, “inflation” and “deflation”? There is a distinct difference between both and its important for investors to understand what the advantages and disadvantages are to having either in an economy. Based on my research I’ve come to the conclusion that inflation should be investors biggest fear while deflation is nowhere in sight.
What is Deflation definition? To understand what this term means, just think of the Great Depression – Falling prices of just about everything – stocks, housing, food, wages, etc. Economic activity comes to a halt and there is mass unemployment and no money to go around. Unemployment can actually reach levels higher than 20 percent in a country when this happens.
Deflation is the worst for people who have a lot of debt but is good for savers and people who have money in the bank, because their purchasing power will increase during deflation.
What is Inflation? Inflation is basically when prices increase every year because the money supply increases. While unemployment may be much lower during inflationary periods, the value of the country’s currency tends to be much lower. So while people have jobs and earn money, the money they are saving has little value and buys much less stuff.
The best investment during an inflation are anything BUT holding currency and include hard assets such as precious metals, food, land, etc.
I believe we are already experiencing big inflation which will only get worse. The USA simply has too much debt and Ben Bernanke, the Federal Reserve chairman, will not allow a deflationary setting to occur. He will keep the printing presses hot to prop up the economy and make the governments debt easier to pay.
There are several things you can do to protect yourself. If you want to be conservative you may want to consider putting your money in inflation protected bonds or inflation savings account. If you want to protect your money even more and perhaps take on more risk, you should consider investing in commodities like oil, gold, silver or even farm land investments.
Hopefully now you understand the differences between inflation and deflation and how to protect yourself from both scenarios.