Essentially, there is a hierarchy of asset classes. At the bottom are the most basic - subsistence food, water and air. Just above that are survivalist needs of minimal clothing, shelter, whiskey and ammo.
Above that are basic utilities such as transportation, electricity, Internet and phone. Some of these weren't so basic in the 1930's, but they are vital now.
The hell in a hand basket crowd is figuring we will be down to the whiskey, ammo and stock piled food level before this is over. I doubt that. I'm figuring we will be down to the basic utilities, perhaps, but not lower. I am however prepared to adapt, if I was insufficiently pessimistic.
This ordering of asset classes all rather resembles Maslow's hierarchy of needs.
What's happening is that we are working our way down that hierarchy. One by one, from the top down, things to toxic or worthless. Lower layers become more valuable at the same time.
Mortgage Backed Securities and Credit Swap Derivatives and stock in Bear Stearns or IndyMac have all gone bad. Stock in American car companies, banks, Fannie Mae and Freddie Mac has lost much value. Overpriced real estate in California, Detroit, Nevada, or Florida has lost perhaps 25%, so far. Stock in Dow (DJIA) or S&P 500 index funds has weakened perhaps 20%. These losses stated so far are relative to the dollar, hence those of us who sold the above weaker assets and went to the dollar were ahead of the game.
The dollar itself, relative to gold, oil, gas, various foods, industrial minerals or the stronger currencies, has weakened, perhaps 50% over the last couple of years, varying in detail. The dollar is higher up in this stack of basic needs than is oil, gas, minerals and food. The strongest currencies roughly manage to track energy and food.
Gold, in times of great distress, has historically been money, but in these times is buffeted by the manipulations of some large banks and by some major investor mood swings, making it difficult for me to tell what it means, or where it is going next.
In summary, you want to get out of the asset classes higher up in the order before the mob does, to preserve your net worth. So long as there are asset classes of substantial dollar denominated value that are higher in this order (intrinsically less essential) than the dollar itself, these classes (like bank stocks) will get lower in dollar denominated value, at the same time as asset classes lower in the order (more essential assets like food and energy) will gain in dollar denominated value.
The dollar still has, and for Americans likely will continue to have, substantial value for its liquidity. I can't just go put my entire life savings in canned food, ammo and whiskey because I can't easily pay my bills and conduct my ordinary financial affairs using such stuff, and would have to pay to store it meanwhile.
Investing dollars in asset classes that are liquid, like stocks, bonds, currencies, ETF (Exchange Traded Funds) shares in gold or commodities is like sailing in a typhoon, without satellite weather. Most things are going down most of the time, but there are dramatic swings back and forth, which one might be able to gain on, if one doesn't get soaked or washed overboard and drowned.
So I recommend moving down, to the more basic end, of this hierarchy of asset classes, while staying as liquid as one can, which includes lowering ones standard of living and reducing ones cash flow needs. Get the heck out of any leveraged asset classes (such as overpriced, highly mortgaged, real estate) and get your life to a point where you could imagine living on half your current income.
Stay healthy, each nutritious food, keep your job, and avoid debt. If you do lose your job, do your best to remain out of debt.
If inflation means rising prices, we will see both rising and falling prices, depending on which asset class, when.
If inflation means too much money and credit chasing too little goods and services, we will see great dislocations in that area, as huge assets classes providing credit, such as mortgage lending funds, collapse, even while Congress and the Fed try to pump more funds into the economy.
This "inflation" versus "deflation" debate is of little more use than the analysis of the six blind men in the Fable of Jaswant the elephant.
Interesting analysis. Thanks...
btt
I appreciate your detailed and informative post. Great points.
I don’t think the question of deflation is invalid. Your points are relatively sound but it seems that you’ve framed all your points from the reference point of the consumer or investor.
What I am asking is: Will we or won’t we repeat Japan in the 1990s. Will we experience deflation so severe that the economy slows to a crawl and economic stimulus doesn’t work. You can say lower your asset class, but that means nothing to broke, credit strapped Joe6pack.
My question is, is inflation going to strain Joe6pack’s budget, or is net deflation going to cost Joe6pack his job. Inflation is painful, but as long as you are working, you just cut back on part of the budget to accommodate your basic needs that are inflating.
But if we have deflation, your company goes belly up and you can’t find a job for 2 years. Not it is not a matter of saying, “damn everything is getting super expensive”, but of saying “wow, I’m draining my life savings just to live and if I run out I have no clue how I’m going to survive!”
So while your post is more thorough and realistically predicts future financial pain, I’m still left wonder if most folks will be working but slipping in quality of life as their dollar doesn’t go as far, or are we going to see extensive bank failures, business failures, and the related massive layoffs that would go with that.
That is my question. I don’t think it is an invalid one.