Friday, April 16, 2010

The New Great Depression

I'm now starting to batten down my economic hatches by cutting expenses wherever possible and by preparing to move my finances to safety in preparation for the HUGE economic storm that is about to hit. The HUGE storm we're facing is another deflationary depression like the dirty thirties. We're entering the dirty teens.

Depressions are caused by an implosion of credit. In other words people, businesses and governments get addicted to debt. More money gets lent/borrowed than can possibly be paid back. This leads to people, businesses and governments (at all levels) defaulting on their debts. Prices on most items decline as a result.

During normal ups and downs stocks, bonds and property will make you money, while cash will not. During deflation the revers is true. Cash, even with no or little interest, will make you money, while stocks, bonds and property will not. There is an exception to this. Stocks will make you money if you short them in a deflationary environment.

How will cash make you money? As I mentioned prices fall in a deflationary environment. The rate of deflation is your rate of return on cash. So if you have $10,000 in cash and the annual rate of deflation is 10% then after one year your $10,000 would have the equivalent spending power of $11,000. Some things deflate more than others. During the last depression property values dropped by as much as 90% or more.

For those of us in the writing, editing and publishing business, a depression offers both enormous challenges and enormous opportunities. The bottom of a depression is a great time to expand a business or to start a new one if you have the cash.

I'll talk more than this in the future.