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.