Inflation and Deflation everything you need to know

Inflation and deflation, are two of the most important in economics because these determine if your money is worth more or if it’s worthless.

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1. First let’s start with Definitions
– What is inflation?
– What is Deflation?
– Why do you care?

Inflation:
– Is when goods go up in value each, causing the buying power of the dollar or any currency to go down
– It’s the reason why people that are 60 and older say, back in my day I could have bought the entire store with $50 or that back in my day rent was $7
– However as time progress inflation hits ( now the normal inflation rate is 3%, so meaning each year the buying power of your money goes down by 3% ) – ( this the standard rate but across many years it could be more around 1%, but during very bad year 18-20% but usually during wars and so on)

Deflation:
– Is the complete opposite, it when goods go down in value ( btw goods also mean real estate and so on )
– The problem with this is a psychological one
– When prices are falling of investments, and people are getting pay cuts, what do you think they do with their money ( they tend to hold money )
– Now what happens when people are not spending money, we go into a recession
– What happens then, markets tend to collapse and the fed steps In with monetary policy to try to promote spending, like lowering interest rates and printing more money
– Usually, in the u.s this has worked, however, we did see that in 1991-2001 the same happened to Japan, but people refused to spend money of that decade and it didn’t help
– Usually, deflation is more dangerous than inflation

2. Protect your self from Inflation Tips 10%
– Well inflation is not the problem, hyperinflation is the problem
– During wars and times of uncertainty, inflation can go into the 20% numbers
– Meaning every 5 years the price of goods double
– Remember that 100k example, well in 30 years at 20% you will need 23M dollars to equal the buying of 100k today.

How do you protect yourself:
– You buy bonds that protected from inflation and they are called tips
– Which stands for treasury inflation protected securities
– So inflations goes up 20% so will the value of your bonds ( which means you will be completed protected )
– It’s guaranteed by the government, so if this fails everything else fails, and then nothing really matter

How much to keep and taxes: 10% and IRS
– According to Benjamin Graham a legendary investor you want to keep 10% of your portfolio in Tips, just in case something goes wrong
– And if you want to also you can hold around 2% in commodities like gold and so on ( but with an index fund by vanguard )
– However, one thing to note about Tips is this, you are taxed on the gain whether you sell or you don’t ( so if you are up 20%, they tax you on that)
– And if you asked me why, my theory is because they want to raise more money during these times.

Tip: https://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_buy.htm

3. Stocks for inflation and deflation
– The common idea is that stocks are good protecting us from inflation
– Because if my portfolio makes me 10% and inflation is 3% ( it means im making money plus beating it )
– That’s partially, but we haven’t experienced double digit inflation in awhile

The old Data says this ( found in this book also )
– Stocks lose to high numbers of inflation 1 out 5 times ( so around 25% of the time )
– And its obvious, because it becomes more expenses to buy raw materials for companies, and more expensive for people to buy
– So that’s why you want to add permanent bonds to your portfolio to help during these times

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*Some of the links and other products that appear on this video are from companies in which Tommy Bryson will earn an affiliate commission or referral bonus. Tommy Bryson is part of an affiliate network and receives compensation for sending traffic to partner sites. The content in this video is accurate as of the posting date. Some of the offers mentioned may no longer be available. I’m an Accountant but I’m not your Accountant, always review information with your Accountant/CPA and your Financial Advisor.

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