By Ken Knight, MBA
The value of a dollar.
In the last blog I discussed DEflation and its impact on our economy. The government doesn't want deflation so they tried a number of things to stop it. First the Fed lowered interest rates to close to zero. That made it easier for companies to borrow money to make improvements in their facilities to improve the economy. That didn't work. Then they flooded the market with 4.5 trillion dollars. You remember QE1 (Quantitative Easing), QE2 and QE3. That hasn't stimulated the economy like it was "supposed to". The flooding of money into the markets has ended. So deflation will continue to push prices of everything down. That includes the price of cars, food, clothing, housing, art, and anything else of value including stocks!
So if the price of everything is going down, what happens to the value of a dollar? Think about it. If last month cantaloupes cost a dollar a piece and today they cost 50 cents, what happened to the value of a dollar? It has doubled in value! Although this is an extreme example, it proves my point. The value of a dollar goes up (you can buy more stuff) as prices go down. A simple concept that is very important for our future financial well-being. The concept is: CASH WILL BE KING! The more cash you hold during a deflationary period, the better off you are. When the stock market turns down seriously (and I KNOW it will) again, your "money" will lose value. If you have cash, you haven't lost money, you've gained money because its value went up (you could buy more stock at a lower price if you wanted to, but DON'T).
I know, holding cash in a savings account or CD is paying bupkis in interest rates and everyone is complaining that their money isn't growing. But when (and I do mean when, not if), the stock market goes down, then who will be the winner. By the way, as mentioned in a previous blog, bonds will eventually go down also, meaning interest rates will eventually go up due to higher rates of return. Real estate is also on the verge of another meltdown as very few changes to banking rules were made after the last fiasco in 2008.
So here's what I'm saying. We are looking at a severe deflationary recession or DEpression in the near future, where cash will be king and, like the other deflationary periods, you will be able to buy stuff, ten cents on the dollar! So your dollar becomes 10 times more valuable! That's what I mean by the value of a dollar! None of us have lived through that kind of setback but our parents did. That's why they grew up frugal.
In the meantime, when many banks start to falter, your money might not even be safe in a savings account! We'll talk next time about where to put your cash (besides your mattress or a tin can in the back yard)!
Best regards,
Ken Knight
The Bear Market Blog
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