Be Prepared for Low Growth/Deflation

Never Been Here Before…
I attended a webinar yesterday where Stephanie Kelton was being interviewed. Kelton is/was a Bernie advisor and a HUGE proponent of the Modern Monetary Theory of economics. She will have a new book coming out which you can pre-order here.

Now, I’m unequivocally opposed to Bernie Sanders and the silliness behind the push for the “Green New Deal” BUT there is some common ground one can find with the Kelton’s of the world:
Deflation is coming.

And what Professor Kelton said in yesterday’s webinar is concerning to me. She said, and I’m paraphrasing here, “If we don’t get inflation in 18 months, we could be in big trouble.”

This, my friends, is a fundamental shift in everything we’ve been taught for nearly 100 years, that inflation, i.e. the continual decline of purchasing power, is the risk. It’s actually sacrosanct among investors for years, you need to invest in order to at least keep up with inflation.

But what if there is no inflation, but rather DEFLATION? How does that change one’s thinking?

Interestingly enough, if we go back in time, starting in the 1870s through the end of that century, we see significant DEFLATION, year after year.

We can also look at 1927 through 1940 and see the same thing.

While there are no instances of deflation in my, or your, lifetime, it actually happened not too long ago. Can we use any of that previous information to at least get an idea of what investing and retirement planning might look like?

Well, yes and in fact, I did a set of videos on this exact thing.
Investing During the Deflation (1870-1900) is here.
Investing During the Great Depression is here.
5% Withdrawals During Deflation is here.

As you’ll notice having a sizable cash holding was a critical aspect to a successful investing/retirement strategy. The reason for that is quite simple, cash INCREASES in value during deflation!

Your cash need do nothing other than sit in a Mason Jar and it will gain value simply because the price of goods is DROPPING.

You must remember money is nothing more than a way to purchase goods. In of itself, money/cash is an inanimate object, it’s meaningless

But, because it’s used to transfer one product, food for instance, to you in exchange for it, it has an intrinsic value.

If a dollar today can buy a hotdog but tomorrow that same dollar can buy a hotdog and a drink, that is deflation. And my dollar is inherently worth MORE than it was yesterday.

I hope that makes sense. As it’s such a fundamental shift in thinking I worry a lot of people will get it wrong.

Did that dollar increase in value because I invested it in some strategy? No! It increased in value due to the price of goods dropping. I need not be Warren Buffet to increase my purchasing power, and thus my wealth, with that dollar. I just needed to have a dollar. And that’s it.

Now, while deflation may sound like a fun thing, I make money by taking no risk??? SIGN ME UP! The problem is that if my dollar will buy a hotdog today, but tomorrow I expect it will buy a hotdog and a drink, then what’s to say in two days it won’t be able to buy me a hotdog, drink AND some french fries?

If that is my expectation, then I’m going to hold onto my dollar for dear life as I can buy more and more products later. And thus the deflationary cycle. As I hold onto that dollar waiting for prices to continue to drop it is removed from the economy and the velocity of money screeches to a halt. When velocity of money declines…look out below! Economic activity slows wayyyyy down. This is what we need to be thinking of today.

What happens when that occurs? It’s such a foreign concept to us raised post-Great Depression.

Japan gives us a glimpse of what may happen. Which is why RIchard Koo’s book, The Holy Grail of Macroeconomics is so critical to read.

We really need to be studying Japan more. As I truly believe that’s where we are going as a nation.

I’ll be doing more videos looking at Japan through a microscope. I haven’t done it much yet. But just you wait.

If Kelton is right, and despite her politics, I think she is, it’s going to be a whole new day in economics, investing and retirement planning.

22 MILLION people filing for unemployment. Let that sink in. And that’s just the beginning. Untold business operations being shut down. Untold furloughs. Untold investments in future growth not being made.

I don’t think we’ve anywhere near the idea of how bad this is going to be. And a $1200 “stimulus” check for the privilege of being forced to be under house-arrest simply won’t cut it.

It’s going to be ugly. I could be wrong, obviously. In fact, never a bad idea to bet AGAINST me… but if I’m even partly right, prepare accordingly.

Build up cash.

Let’s look at some charts comparing Japan to the U.S. Maybe there is something we can extrapolate to figure out what might be in store for us, here in the Good Ole U.S.of A. 

Let’s start with this from about Japan’s GDP growth rate over the last 40 years. 

Japan’s Annual Growth Rate

Notice in the 1980’s a few quarters it was negative. But mostly the growth rate was extraordinary.  

Then came the 1990’s and BOOM!!!!  tons and tons of negative growth. Look at all that!  Quarter after quarter, year after year, just languishing. 

2002 comes around and it looks like Japan is back. Yet, in 2009, which was the year the book by Richard Koo I keep referring to came out, The Holy Grail of MacroEconomics, starts another cycle of a perpetual yo-yo economics, up-down, up-down. 

Through it all one thing remained constant..check this out:

Japan Inflation Rate

Low Inflation – Deflation even!  From 1993 on, nothing. No inflation to speak of, at all. No matter what the government or the Bank of Japan did it was nearly 0% inflation year over year. It’s crazy because NO textbook would ever predict this. 

All the econometrics, data mining and modeling, none of it mattered.  Not one economist would have predicted that Japan for nearly 30 years would sustain such low inflation, especially given the amount of debt the country had accumulated. 

Let’s take a look around the world shall we?

Economies Around The World

First thing I want to point out is the DARK red cell. That is Japan’s Debt to GDP %. It’s nearly 250%!   

Secondly, go to the left a bit on the same row and you’ll note that the Japanese GDP grew all of 1.20% Year over Year from the 2nd quarter of 2018 to the 2nd quarter of 2019.  

Thirdly, note the interest rates.  A NEGATIVE 50 bps. 

And lastly, notice the inflation and jobless rate, all of .50% and 2.20% respectively.  

It isn’t supposed to work this way!  I can’t stress this enough. 

So, how does the US compare? 

U.S. Growth Rate

Well, as you can tell from the above our yo-yo economy has been subdued over the last 30 years or so, and of course, inflation has followed suit.  Low inflation, moderately low growth. 

We’ve had some years with growth in any quarter is over 5% and we’ve had some years where growth in any quarter is negative.  But a whole lot less variance than what used to be, that’s for sure. 

How is the US inflation rate been?

U.S. Inflation Rate


As you can see from the chart below, it’s been very stable, hovering well below 5% for the last 20 years.  

How about other U.S. economic data?

Right now our inflation rate is 1.80% with a growth rate of  2.30%. U.S. interest rates are 2.25%, jobless rate is 3.70% and debt to GDP is 106%, which is the third highest of the major world economies. 

Compared to Japan, we have less debt to GDP, more inflation, higher growth, higher interest rates but also higher joblessness.  

Let’s take a look at our stock market vs. theirs too. 

The Nikkei:

The S&P 500:


Lots of similarities there, no? 

And like Japan, we also have an aging population.  Automation WILL affect us all. How? No one knows. But it will be disruptive indeed. 

Interestingly, though, is how the average Japanese Household has kept its debt level in check, to some degree, over the last 25 years or so. 

Japan HH Debt to GDP

Notice, the Japanese HH debt to GDP flattened, shrunk and leveled off from the 1990’s to today.  Could THAT, and that alone, be the cause of the Japanese low growth, low inflation, low interest rates AND low joblessness?

Maybe.  But let’s just say that in the U.S., with our insanely high debts to attend college and buy houses, people simply STOP borrowing and instead pay down what they owe. 

What will happen then?  Hard to see a growth-like scenario like the 1950’s and 1960’s when we were just starting our love of debt consumption. I think that ship has sailed and Americans are starting to realize that taking on enormous amounts of debt is not a path to prosperity but rather one to indentured servitude. Most people don’t want that. 

My Prediction

And thus, my prediction is the U.S. economy will be more like Japan going forward. Which means you need to throw away your economic textbooks and figure out HOW to prepare for a low inflationary/deflationary economy.

I’ll be thinking on this a lot going forward. Would LOVE to hear your thoughts. 


Some recent Japanese economic headlines.  Not much different from our own, no?

Japanese Economic News Headlines

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