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Anyone hoping for deflation?
Old 08-06-2010, 08:50 AM   #1
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Anyone hoping for deflation?

That 3% inflation multiplier in ER projections is a real bummer. I have 50% of my investments in high grade corporate and government bonds and a 3 years cash bucket, so should I be hoping to retire into a period of deflation?
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Old 08-06-2010, 09:49 AM   #2
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That 3% inflation multiplier in ER projections is a real bummer. I have 50% of my investments in high grade corporate and government bonds and a 3 years cash bucket, so should I be hoping to retire into a period of deflation?
I don't want deflation because it will keep unemployment high. However, I think we will have a continuing slow non-recovery, similar to what Japan has experienced. I don't think there is anything we can do to prevent it. It took decades to get us to where we are, there is no quick fix.
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Old 08-06-2010, 09:55 AM   #3
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No. High inflation is bad, but prolonged deflation is an economy and jobs killer, period. From a personal standpoint, someone who has a lot of fixed income investments is likely to do well in period of prolonged deflation, but it's still an economically devastating event.
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Old 08-06-2010, 09:58 AM   #4
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I have 50% of my investments in high grade corporate and government bonds and a 3 years cash bucket, so should I be hoping to retire into a period of deflation?
Sure, as long as you are comfortable seeing high unemployment and economic misery all around you.
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Old 08-06-2010, 10:01 AM   #5
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I was asking the question from a completely selfish standpoint. If I was young and looking for a job deflation would suck, but as an potential ERer
with a fair amount of cash and Gov bonds would it be so bad to have that inflation multiplier be negative for 10 years.
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Old 08-06-2010, 10:06 AM   #6
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I was asking the question from a completely selfish standpoint. If I was young and looking for a job deflation would suck, but as an potential ERer
with a fair amount of cash and Gov bonds would it be so bad to have that inflation multiplier be negative for 10 years.
From a strictly selfish standpoint, no it wouldn't be a bad thing. If someone had a lot of high-quality bonds and/or a reliable income stream like a pension or an annuity, deflation would be wonderful for a retiree. It's still not something I'd want to see, though -- I don't want my good fortune to become schadenfreude.
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Old 08-06-2010, 10:32 AM   #7
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From a strictly selfish standpoint, no it wouldn't be a bad thing. If someone had a lot of high-quality bonds and/or a reliable income stream like a pension or an annuity, deflation would be wonderful for a retiree. It's still not something I'd want to see, though -- I don't want my good fortune to become schadenfreude.
I have rental income so that would be a good thing if deflation happens. While I'd far rather see a strong economy, the reality is that I have to be prepared for the other possible scenarios as I'm hoping to ER in a year or so.
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Old 08-06-2010, 10:36 AM   #8
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I have rental income so that would be a good thing if deflation happens. While I'd far rather see a strong economy, the reality is that I have to be prepared for the other possible scenarios as I'm hoping to ER in a year or so.
But if deflation happens, rents could decline as well.

So far the deflation is really only in big ticket discretionary items and really isn't a factor for "essential stuff" but that could change.

Frankly I'd be wracked with "survivor's guilt" if I profited from deflation while it made everyone around me miserable. I'm not saying I'd choose to be miserable with them, but I'm just saying depressionary deflation isn't what I'd want even if I could prosper because of it.
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Old 08-06-2010, 10:41 AM   #9
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I definitely would not like deflation. I have huge student loans (rates fixed for 26 more years) and a smallish mortgage fixed for the next 5 and with a floor on rates such that lower interest rates wouldn't help me. I could always refi the mortgage if rates dropped even further.

I would actually prefer inflation to pick up a little to around 4% to help inflate away some of my debt. And then drop back in the 2-3% range once my debt is paid!
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Old 08-06-2010, 10:48 AM   #10
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If deflation is such a boon for retirees, how come poverty has increased dramatically among Japanese elderlies?

Millions of Japanese trapped in 'hidden poverty' - Yahoo! News

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It is now often the elderly -- whose proportion in society is on the rise in rapidly greying Japan, with its low birthrate and high life expectancy -- who pay the heaviest price as poverty grows in Asia's biggest economy.
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Old 08-06-2010, 10:54 AM   #11
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If deflation is such a boon for retirees, how come poverty has increased dramatically among Japanese elderlies?

Millions of Japanese trapped in 'hidden poverty' - Yahoo! News
How many of the horror stories here deal with people who have a lot of income in investment-grade bonds or a secure pension?

I would agree that for a lot of people not in these circumstances, deflation is simply no fun.
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Old 08-06-2010, 11:00 AM   #12
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How many of the horror stories here deal with people who have a lot of income in investment-grade bonds or a secure pension?

I would agree that for a lot of people not in these circumstances, deflation is simply no fun.
That's what I was getting at in the OP. I have stable rental income (it's in Boston and I have long term tenants). 50% of my portfolio is in Bond Index funds and cash, so would deflation be that bad for me. Sure, I don't want to see people unemployed and poverty on the rise, but is it a scenario that would be ok or even good for me financially.
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Old 08-06-2010, 11:02 AM   #13
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I don't know how truly "secure" pensions would be in deflationary periods. How would local governments continue to pay pensions if tax revenues fell off a cliff for an extended period of time? And would corporations be able to continue paying interests on their debt if the economy fell into a deflationary trap? If enough people are out of work and can't afford to pay rent, won't it affect rental income as well (less demand, more offer = lower prices)? What about the Federal government? The country carries so much debt, deflation will only make it more burdensome. Services will have to be cut. Benefits (such as SS, Medicare, etc...) will have to be cut. Taxes might have to increase. How insulated would you be from all this?
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Old 08-06-2010, 11:07 AM   #14
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I don't want deflation because it will keep unemployment high. However, I think we will have a continuing slow non-recovery, similar to what Japan has experienced. I don't think there is anything we can do to prevent it. It took decades to get us to where we are, there is no quick fix.
I have to agree. Aside from the finances there is the social affects. Imagine the negative atmosphere we would have from high unemployment and problems we would have from poverty. It wouldn't be a lot of laughs.

Deflation might be good for the individual who is invested for it but then again they might not enjoy it because of the social environment.
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Old 08-06-2010, 11:10 AM   #15
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Deflation might be good for the individual who is invested for it but then again they might not enjoy it because of the social environment.
Agreed. Misery is contagious. And even if I was okay, if most of the people around me were struggling, unemployed or underemployed with declining wages, I doubt it would be much fun. Again, not saying I'd choose to be financially destitute with them, but I wouldn't derive much pleasure from the situation.
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Old 08-06-2010, 11:18 AM   #16
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That's what I was getting at in the OP. I have stable rental income (it's in Boston and I have long term tenants). 50% of my portfolio is in Bond Index funds and cash, so would deflation be that bad for me. Sure, I don't want to see people unemployed and poverty on the rise, but is it a scenario that would be ok or even good for me financially.
Interesting question, and with a pension it is something I've been thinking about recently.

The first thing I worry about is that there will have to be wage deflation, and before you get workers to agree to that sort of thing they have to be very scared. And the only way you get that is to have massive unemployment - not this piddly 10% stuff we have now. I look at police layoffs in places like Oakland, and East St. Louis and see that if the employees/unions would have made wage concessions that they would have saved their less-senior coworkers jobs. If deflation comes around, it will be people making wage concessions just to keep their jobs.

When it gets that bad I think some people will be better off than others. But it will be like someone who is genetically unable to get the disease that is killing off almost everyone around. You may live, but in what kind of world will you live?

My FiL's step-dad was a banker during the Great Depression. FiL said they did better than a lot of other people, but life still sucked. I'm not sure all what the man experienced, but I know he could hang on to a dollar like it was the last one he would ever see.

In deflation it will suck to be a debtor, but it's not going to be a party just because you're a creditor. Having a lot of cash would be nice though.
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Old 08-06-2010, 12:07 PM   #17
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I was asking the question from a completely selfish standpoint. If I was young and looking for a job deflation would suck, but as an potential ERer
with a fair amount of cash and Gov bonds would it be so bad to have that inflation multiplier be negative for 10 years.


I would think that the harm of long term deflation would do so much damage to the US that it would also harm an ER plan...
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Old 08-06-2010, 12:11 PM   #18
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I would think that the harm of long term deflation would do so much damage to the US that it would also harm an ER plan...
Yep. Long term deflation would be devastating to almost everyone. Even people who feel "secure" now would likely be impacted if the deflation lasted for decades. In that scenario the best retirement plan would be to kick the bucket just before it really hit the fan.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

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Old 08-06-2010, 12:17 PM   #19
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Deflation sucks for almost everybody. Even if you managed to invest 100% in fixed income, you're still going to have some worry about running out of money or bond issuer insolvency. You're going to have lots of family members letting you know how you should be helping out everybody else.

And there will be misery everywhere.
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Old 08-06-2010, 02:17 PM   #20
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How about this: largest deflation / smallest inflation possible before society goes "noticeably" nuts... Not sure whether that's a small inflation of 0.1% or say deflation of -0.1%? -1%? -5%?
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