Understanding Deflation: How to Invest During This Period

During periods of economic downturn and falling prices, investors often feel anxious. This article will help you gain a deeper understanding of what deflation is, how it impacts the economy, and what tools can be used to generate profits during these challenging times.

What is Deflation? Not a Safe Situation

Deflation (Deflation) is the opposite of inflation, a situation where the overall prices of goods and services decrease continuously. A negative inflation rate means that the value of money increases, and people’s purchasing power improves, allowing them to buy more with the same amount of money.

However, not all goods decrease in price; the overall average declines, while some categories may see prices rise and others fall.

Causes of Deflation Are Various

Supply Side (Supply Side)

When production increases rapidly over a short period, new technologies reduce production costs, or productivity (Productivity) rises, prices tend to fall naturally.

Demand Side (Demand Side)

When consumers stop purchasing, demand for goods shrinks, or heavy household debt burdens cause people to cut unnecessary spending, liquidity tightens.

Other Factors

• Tight monetary policy by central banks
• Reduction in circulating money in the system
• Policy mistakes by the government
• Major bubble burst (Bubble Burst)

Real Examples of Deflation: From Thailand to the United States

Thai Economy During COVID-19

In April 2020, Thailand’s overall inflation rate dropped to -2.99% (YoY), the most severe contraction in 10 years and 9 months. Economic activity restrictions, decreased demand for goods, and low oil prices contributed to this situation.

“The Great Depression” – The U.S. Economic Collapse

On September 4, 1929, the U.S. stock market’s “Black Tuesday” triggered what is known as “The Great Depression” from 1929 to 1932:

• Global GDP declined by over 15%
• Unemployment rate in the U.S. soared to 23%, some countries up to 33%
• Exports fell by over 50%
• Agricultural land prices dropped below 60%

The effects persisted into the early years of World War II.

How Deflation Affects the Economy and Daily Life

Negative impacts to be aware of

1. Rising Unemployment

As prices fall, profits for producers decrease, leading them to cut costs by laying off workers, which increases unemployment rates.

2. Severe Deflationary Spiral (Deflationary Spiral)

• Consumers expect prices to fall further, so they hold onto cash instead of spending
• Producers must lower prices further, encouraging more purchases
• Producers cut costs by reducing employment
• Unemployed people have less income and buy less
• Prices and costs are reduced again… (endlessly)

3. Impact on Businesses

Profits stagnate, consumers buy only essentials, many businesses suffer losses, and some may shut down.

4. Overall Economic Impact

Economic slowdown, reduced production, halted investments, and project failures.

Positive effects some people benefit from

1. Cash becomes more valuable

Holding cash during deflation increases purchasing power. Those with savings benefit.

2. Creditors benefit

Creditors gain because the money they receive back is worth more. Debtors must repay loans with more valuable money.

3. Fixed-income earners

Wages remain steady, but falling prices improve their purchasing power.

4. Goods become cheaper

Consumers can buy more at lower prices; those with cash may gain significantly.

Stock Market and Deflation: What Should Investors Do?

During deflation, stock markets often decline, but opportunities still exist. Smart investors can profit in various ways.

Investment Strategies During Deflation

1. Choose Quality Stocks (Quality Stocks)

Select companies that continue generating revenue even in downturns, such as consumer staples, food, and beverage companies with consistent demand.

2. Bonds (Bonds)

In deflationary periods, central banks often lower interest rates, increasing bond prices. (Buying now may yield profits as prices rise). Focus on high-credit-quality bonds.

3. Gold and Other Commodities

In downturns, gold prices often rise as a “safe haven” asset. Trading CFDs allows profit from both upward and downward price movements.

4. Real Estate

Property prices may fall; sellers eager to unload assets create buying opportunities for future gains. Choose locations with growth potential.

5. Short Selling and Put Options

Advanced investors can profit from market declines by shorting stocks or buying Put Derivative Warrants.

What investors should do

• Divide and Conquer: Systematically buy, sell, take profits, and cut losses
• Diversify: Avoid concentrating on a single asset; spread risk across different assets
• Research: Understand the companies, instruments, and assets before investing
• Hold Cash: During deflation, cash gains value; keep some reserves to invest at optimal prices

Government Measures to Address Deflation

If the economy enters deflation, governments need to implement monetary and fiscal policies to resolve the issue:

• Lower interest rates to increase liquidity
• Reduce taxes to boost consumer spending
• Increase government expenditure on investment projects and job creation to stimulate economic activity
• Ease credit restrictions to allow banks to lend more
• Promote foreign investment to generate external income
• Reduce utility costs such as water and electricity to ease household burdens

Summary: Deflation Is Not a Disaster, But an Opportunity

Deflation causes economic pain, but for those prepared, it opens doors to reassess assets and opportunities.

Key Reminders for Investors:

1. Study and understand before deploying funds
2. Diversify assets to reduce total risk
3. Invest gradually; wait for the right timing
4. Recognize that all investments carry risks; prices may rise or fall

Beyond that, plan your finances carefully, minimize worries about the economy, and create more opportunities.