What is deflation? How to cope and invest to achieve returns

Understanding Deflation Before It Affects You

Deflation (Deflation) is not a strange term for modern investors. It is an economic condition that is the complete opposite of inflation. While inflation causes prices of goods to rise, deflation causes prices of goods and services to decrease gradually over time.

When entering a deflationary period, the value of the currency increases, giving you greater purchasing power. With the same amount of money, you can buy more goods and services. However, what seems like an advantage on the surface may hide a short-term satisfaction underneath.

How Does Deflation Occur? Causes You Need to Know

The impact of deflation is numerous and complex, but once you understand the causes, you will see why it is a serious problem.

Supply side: Increased productivity, prices fall

Deflation occurs due to an increase in supply. When companies adopt new technologies, production becomes more efficient, reducing production costs, which leads to lower prices. Sounds good, right? But when everyone reduces prices simultaneously, small companies may start to face problems.

Demand side: Reduced purchasing desire, people wait for lower prices

On the other side of the coin is demand reduction. When people have debt, their income decreases, or economic confidence is poor, they stop buying goods. As they wait and wait, producers decide to lower prices again, creating a continuous downward cycle.

Other factors causing deflation

• Incorrect monetary policy: Central banks raising interest rates too high, causing people to stop borrowing and investing
• Liquidity trap: Money in the economy is insufficient; people prefer to save rather than spend
• Economic crises: Major events like COVID-19 causing everything to halt

Does a recession always come with deflation?

Yes, almost always. When GDP declines for two consecutive quarters, it signals that the country is entering a recession.

Money flow contracts → People spend less → Companies reduce production → Layoffs increase → People stop buying → Companies incur losses → Prices drop → Deflation

This is a frightening and hard-to-stop cycle.

Who Is Affected by Deflation?

Beneficiaries: Creditors and fixed-income earners

• Creditors: When prices fall, the money they hold gains value
• Fixed-income earners: Their monthly salary remains the same, but what they can buy increases

Those at a disadvantage: Entrepreneurs and debtors

• Entrepreneurs: Profits shrink; some may need to cut wages or close their businesses
• Debtors: Debt becomes heavier; they sell goods, but the money received is worth less

What to Invest in During Deflation?

1. Fixed Income Securities: Stable Returns

During deflation, the Bank of Thailand may lower interest rates, increasing the value of fixed income securities. Investing in bonds or highly credible debt instruments is a safe option.

Important: Choose debt securities issued by organizations with good credit ratings to avoid default risk.

2. Strong Company Stocks: Find Companies with Profits

In a bear market, you should not stop investing but rather select companies that:

• Still generate consistent revenue
• Have products/services that people still need to buy even during economic downturns (such as food, beverages, medicine)
• Have strong financial positions

Use the “Dollar Cost Averaging” (DCA) strategy—buy a small amount every month instead of investing all at once.

3. Real Estate: Falling Prices as Opportunities

When the economy is bad, people sell real estate at low prices to keep cash. This is the time you can:

• Find properties in good locations at lower prices
• Hold them until the economy recovers
• Sell when prices increase again

Real estate investment requires time; suitable for those with funds not needed in the short term.

4. Gold: A Hedge Against Risks

Impact of deflation on gold prices is often initially negative, but gold has several advantages:

• Has intrinsic value
• Diversifies your portfolio’s risk
• Long-term, tends to appreciate with financial conditions

For short-term traders, CFD trading in gold is another option, offering opportunities for both bullish and bearish speculation.

5. Cash: Don’t Miss Out

During deflation, holding cash is not actually a loss. The value of money increases, allowing you to buy at the right moment.

High-yield savings accounts are also a good choice.

How Does Deflation Affect the Global Economy?

The global economic indicator (Global LEI) shows a continuous downward trend, warning that:

• U.S.: Growth rate has been negative for the past 6 months
• Global economy 2023: Projected to grow only 2.7%, below pre-crisis average
• Risks: Russia-Ukraine war, energy crisis, cost of living crisis

Rising unemployment → Reduced spending → Business contraction → Global recession

How Can Governments Address Deflation?

Measures that governments and central banks may implement:

• Lower interest rates to encourage borrowing and investment
• Expand spending (Fiscal Stimulus) through budgets or direct transfers to citizens
• Buy debt securities to increase money circulation
• Reduce taxes to give people more disposable income
• Support investments from both public and private sectors to create jobs

Planning Investments During Uncertainty

There’s no need to fear the impact of deflation if you have a plan:

1. Divide holdings between cash and investments according to your age and goals
2. Manage risk by diversifying purchases and sales, and setting Stop Loss orders
3. Choose quality assets rather than speculative trends
4. Follow economic data to adapt promptly

Summary: Deflation Is Not the End, But the Beginning of Choice

Deflation is a real-life situation that all investors must face. But it is not hopeless. Those who understand the causes and invest wisely often come out well after a crisis.

Key: Education, planning, and prudence are the keys. Remember, investing involves risks. Set your risk level appropriately and invest carefully.