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Inflation or… Deflation?

Inflation or... Deflation?

A leap of $$ injection into the economy has been made by the US Government more than 2 years ago to deal with the pandemic. Looking back, this creates such a “bond” to 2022 flare-up inflation, now entering a fresh recession of 2023. 

Not many did survive. What about you? Will you let your guard down this time?

Key take-away

  • Inflation is not frightening as half as deflation 
  • Even if deflation does consistently emerge, it does not mean prices are going down; rather, it only implies that prices are not rising as quickly
  • Hiking up interest rate is not the way to control inflation, especially high interest rates does not increase the price of food or energy to solve out the supply bottlenecks
  • Even throughout that century of natural deflation, real estate is a really sensible investment

It has been a couple of years since the United States injected a huge deal of billions of dollars into the economy, either did other countries. The so-called “economists” turn up with concern over the fact that money soon escalates to the top of the ladder, assets and goods can not bear to catch up. This, out of question, leads to waves of inflation. But at the end of the day, a real trigger should be deflation – when the price of assets and goods starts to bleed. 

Here is how it goes. COVID-19 acted as a cause of the massive drop in shopping rate. People went through unemployment. Enterprises failed to pay debts, which led to a serious decrease in the purchasing demand. Therefore, less demand than supply created a downfall in goods and products, then businesses continue to shrink and lay off thousands of human resources. Price persists to drip-drop. Such a vicious cycle is likely to appear even more frightening than the existing term “inflation”.

The issue does not stop there. Administrations are supposed to decide whether it is possible or not to continue infusing heaps of money. Once bills are overratedly injected, inflation occurs; and if an inadequate amount of capital sticks in, deflation appears. Hiking up interest rates is not the way to control inflation, especially high interest rates do not increase the price of food or energy to solve supply bottlenecks, according to Nobel Prize in Economics winner – Joseph E. Stiglitz in Globalization and its Discontents (2002). How much is enough, and how to implement might be one of the most challenging ideas to imagine. 

When there is no systemic issue, “just-in-time” inventory systems perform well. However, it is simple to understand how even a minor interruption can have significant effects if X is required to generate Y, and Y is required to make Z, and so on. A market economy often finds it difficult to adapt to substantial changes, such as a shutdown that is almost complete followed by a restart. And after years of underpaying workers, especially those at the bottom of the pay scale, that difficult transition finally materialized. 

Since “Barclays Capital Inc. says 2023 will go down as one of the worst for the world economy in four decades”, there is a good chance the U.S. economy will tip into a recession either this year or in early 2024. “Both consumer home buying and home-selling sentiment are much lower than they were last year,” says Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae. And he continued: “In our view, this is unsurprising given that mortgage rates have more than doubled and home prices remain elevated.” Even if deflation does consistently emerge, it does not mean prices are going down; rather, it only implies that prices are not rising as quickly.

However, the fact that prices of anything cannot approach zero largely prevents deflation. In other words, deflation may not be as likely to spiral out of control as inflation. Purchases are made when needed in times of deflation and several of them might cost a little bit less in a few years, but the majority of purchases cannot be put off in this way. While inflation discourages excessive spending, holding money, in fact, means willingly allowing its value to decrease. Long-term economic and population growth takes place, while the amount of available land remains the same. That suggests that changes in supply and demand lead to a modest price increase to counteract the underlying (very gradual) deflation.

Then, real estate is a really sensible investment—even throughout that century of natural deflation. For purchasers, a slower rate of appreciation or even a period of stable housing costs can enable greater income growth. If your salary growth outpaces home price rise, you might be able to buy a little more comfortably in a few years rather than straining yourself too much right now. However, there are no certainties, and in the meantime, rents have undoubtedly increased. When buying a home today to avoid rising costs and interest rates, it’s fine to wait if the numbers don’t add up. Even though you’d be delaying accumulating equity, you might discover that you’re in a better position to buy later, when the market slows and your income may have had a chance to increase.

The market is shifting in favor of sellers. Depending on where you live, you could need to lower your pricing or encounter fewer takers. Don’t overlook what transpires on the other side of the exchange: You’ll have to compete for a small number of available homes when it comes time to buy your next place to live, and you’ll probably need to get a new mortgage with a higher interest rate on top of that. 

To buy all shares and on-ground houses as soon as inflation encounters, or to sell properties to take all cash? To save or to ride or die with the investment? Will going all in one side be useful? That being said, we all should best prepare for what is to come. 

By Facebook, Money US News, and Bankrate

Reece Almond