Sunday, August 1, 2010

Personal Finance in a Deflationary Period

(This is the first of what I hope to be a pair of posts. This one will address the personal finance issues; the other, over on Advice Unasked, will address broader issues of economics and policy.)
  1. Don't hold debt. Most salaries will not rise in this period; we will not be in a better position to pay down debt in the future.
  2. In general, debt securities are preferable to equities in deflationary times, however this only applies if the debt securities are trustworthy—hard to judge in the current regulatory and financial reporting regime. There is something to be said for a savings account, or even cash in an actual safe, though the safe carries a risk of burglary.
  3. Most property is likely to fall in value in this period.
  4. Speculation will at times raise the prices of some valuables like jewels and precious metals through this period, however this is not something to be relied on; even speculators can run short of cash.
  5. Bartering personal services in this period is a way to conserve cash. So is making things for oneself or trade—but watch the cost of supplies! A new craft economy is likely to emerge in the lower and middle classes. If one has tradeable skills, polishing them has a good chance of paying off; if one does not, this might be a good time to start learning them. Buy tools as needed, rather than in advance; chances are they will cost less in the future.
  6. Ian Welsh reminds me that we are seeing inflation in some products and services of interest to the very wealthy. He points out that there has been an explosion in purchases of personal jets and rentals of super-expensive hotel rooms in the past 15 years, and I have seen a recently-constructed 120-foot (36.5m) luxury yacht. It may be possible to make gains operating such businesses, or investing in them.
The following points relate to the broader economic issues, and I hope to expand on them in my planned second post. There are many more questions than answers here. I suggest you take them as some of the unknowns that make finance uncertain.
  1. What will the rate of deflation be? How long the is deflation likely to persist? I find it hard to believe it will go on for more than two years, but that could be fear and intellectual rigidity rather than reason speaking.
  2. It seems to me likely that the Chinese central bank is going to "take away the punchbowl," in William McChesney Martin's famous saying, now that they've got the party going, by allowing the renminbi to rise against the dollar in the next few years. Some products we have come to depend on will then become more expensive. This to some extent militates against my advice to save above: in some areas (electronics?), it may be worthwhile buying what you need against this possibility. Information processing technology is now a key manufacturing technology, and the majority of integrated circuits and flat-panel displays are made in China.
  3. There are probably other impacts of global markets likely.
  4. The health care mandates will make it much harder for many people to save. It is probably best to do as much saving as possible before they kick in in 2014.
  5. Climate change is making itself felt economically in a large way; we are already seeing climate-change based migration.