Jason Zweig wrote an interesting article on the fact that what really matters about inflation or deflation is how it impacts you, and either one can be beneficial or detrimental depending on your own personal circumstances (read the full article here).
- Deflation negatively impacts (conversely inflation positively impacts) people’s job security, value of stocks, makes it harder to pay off mortgages with lower income, and depresses the value of your home. Basically deflation is bad for assets with variable future cash flow streams, and fixed liabilities.
- Deflation is beneficial (conversely inflation is detrimental) if you have a fixed future cash flow stream (e.g. Social Security or pension).
- Long-term bonds do well during deflation (Japan’s experience)
- The best protection for inflation are Treasury Inflation-Protected Securities (TIPS) where the principal value is adjusted for inflation. REITS and stocks in general offer moderate protection. It is not clear whether commodities offer inflation protection.
David Dreman also highlighted that stocks are a hedge against inflation and depreciation (full interview here). He highlighted that stocks did well in Germany when the mark went down to one billionth of its value. German Stocks went up during the 20s in terms of real purchasing terms. The same thing happened in Brazil.