I came on a new word. It is one that I would not have thought possible, nonetheless it is worth thinking about. Hyperdeflation. I found it in an article at seekingalpha.com. Hyperdeflation: The Emerging Threat
I have read it twice and I am having trouble keeping my nonsense filter from dismissing it. I suspect it is near impossible but near impossible is not impossible. There are some things to notice.
My instinct was to think of it as negative hyperinflation but I cannot understand it like that. As the author points out, fast hyperinflation is not the only kind of hyperinflation. Hyper means excess not necessarily fast. Fast seems to be the idea I have attached to the word. Slow hyperinflation is a possibility and that is likely where we have been for the last 50 or 60 years.
I have taken to dividing current prices by 8 and seeing if the result matches my intuition of value. Most things not manufactured, especially electronic, fit. There are exceptions. Some good – like wine. Gasoline is more, but cars get much better mileage so I don’t notice that. It is not the goods that are not worth the money, it is the money that is not worth the money.
Maybe slow hyperdeflation would return prices to where they were. It could take a long time. Would quick be better?
Hyperdeflation is arithmetically different from hyperinflation. I can have 100% inflation or 1000% for that matter, but not 100% deflation. After 100% deflation prices are negative and while interest seems able to go there, I doubt farmers will pay you to take their produce.
Interest rates, taken as the price to use someone else’s money, are becoming a little negative. Central banks seem to think it is to their advantage and I don’t suppose they will stop until they get slapped. Are negative bond rates a harbinger of hyperdeflation. Maybe, but not for sure.
What to do?
Precious metals are a suggestion by the author. There may be others too but they will tend to be situational rather than generic. More skill will be needed for those.
No one really knows how to deal with deflation because it has been rare since governments gained control of fiat money.
As always, news of any kind, good or bad, benefits someone. The trick is to be one of the someones who benefits or at least avoids disaster. There is one possible scenario that is very challenging. That is noticeable deflation followed by sincere inflation.
After all, the cure for deflation is more fiat money, worth increasingly less. The danger to investors, everyone more likely, is that a good defense to deflation may well be a disaster when inflation appears as a defense.
I intend to reread some material on interest rates from Knut Wicksell and see if there are any clues. Interest is a price and perhaps its fall is the first clue to appear.
I think government involvement in markets is wrong and eventually there will be chaos. They keep adjusting.
Years ago we had a pejorative term for this. “Adaptive Management.” A euphemism for “Trial and Error.” Governments have the error part fully developed.
I don’t see this as a panic situation, but I would not fully discount the possibility. Be alert and carefully address your needs and purposes. Understand your personal meaning. Never lose sight of the fact that some of your investments are just numbers, while some others represent deferred groceries. Under uncertainty, you must not manage these parts the same way.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772