Have you heard about the booming business in home safes? Home Depot may not be selling too much drywall these days, but safe sales are up by a third aross the United States. I did some investigating in my neck of the woods today. Sold out here, too.
Why would people want safes? For cash. There is a growing sense the banks are over-leveraged financial death traps and that no government is currently speaking the truth with citizens. Cash might be one of the three things you really, really, really will want to have if the lights go out, you wake up one more and there’s a ‘bank holiday’ or if deflation turns more serious. The odds of one of those things happening, I’d say, are growing longer as the days shorten.
Deflation is the opposite of inflation. When prices continuously rise – something most of us have been used to our entire lives – then it takes continuously more money to buy stuff. The value of assets rises which makes the value of money fall. That’s inflation. If your income does not also rise, you are a loser. But if you owe money in the form of a mortgage on a house which is gaining in value, you win. The asset value goes up, the debt stays the same, so your equity increases, and your ability to repay that loan is enhanced.
It was inflation on crack which hit the real estate market since Nine Eleven. This hyper—inflation caused a bubble which drove the price of houses far beyond the ability of people to afford them, so it ultimately popped as demand dropped. This is the worst aspect of inflation – its ability to make the essentials of life unaffordable (though I’m not sure a media room and a hot tub qualify). In an inflationary world, savers lose and investors win. It makes no sense having suitcases full of cash sitting around, because its purchasing power is constantly eroded. You’re far better off to convert cash into those things which are rising in value. And, finally, it makes great sense to borrow more money to do the same thing, since inflation pushes down the burden of debt as it increases commodity prices,
Take a mirror to all of this, and you have a deflationary world – the one we are entering now at a hell of a clip. In this environment, all the rules change.
Prices start dropping for commodities, then services, followed by business profits and wages. Lack of consumer demand forces prices below the cost of production, which leads to mounting unemployment, even less demand and even lower prices.
In deflationary times like these, the value of cash rises and the cost of houses, cars, iPods, bank shares, pet food and most everything else declines. That means purchasing power goes up for those people with money. At the same time, it makes debt intensely harder to pay since loans and lines of credit don’t go down. With real estate, deflation is a double killer. (a) House values drop below the price many people paid to get it. (b) Because the mortgage debt remains constant its burden rises as equity is wiped out. This is exactly what’s happened with scores of American families – more than seven million of them – who are in negative equity. There’s no doubt the same is going to happen in Canada, as real estate continues to drop, turning homeownership into a nightmare for those who purchased a home since 2006. This is a disaster, of course, for people – like tens of thousands of autoworkers in southern Ontario – who have lost their jobs in this deflationary cycle, and yet live in areas where the cost of housing was high.
For economists, deflation is far scarier than inflation. It should be for you, too. This is what caused the Great Depression.
