Deflation Is Unthinkable – Part 1 — Faith and Finances Ministry — Faith and Finances Ministry

I recently requested health insurance quotes and the broker’s reply email started with, “…hope you are sitting down once you get to looking at these rates.”  The premiums were so high it really made me start questioning the integrity of our entire financial system.  Will wages perpetually (and sufficiently) rise to match the increase in the cost of basics, or will there be a terrible unwind that resets prices to sane levels?

What is Deflation? 

Deflation is a contraction of the money supply.  The Federal Reserve Bank of St. Louis says, “Deflation is a sustained decrease in the price level of goods and services.”  Purists would argue that this definition is the result of deflation.  Deflation is the opposite of inflation, the phenomenon we are much more familiar with.  No one has seen sustained deflation since the 1930s Great Depression.

Deflation Has Become Unthinkable 

We’re so used to constantly rising prices, wages, and investment valuations, that we base all our financial decisions on inflation.  Buy houses and stocks, because they only go up in value!  Cash is trash, because it only goes down in value!  It’s hard to envision a world, even for a few years, where all prices fall.  Our recency bias tells us that the Federal Reserve and Treasury would never allow deflation, because it could set off a vicious chain reaction that can’t be stopped, like in the 1930s.

We caught a glimpse of deflation in 2008, but the money printers went into overdrive to “save the day.”  Stock and home values fell for a relatively short time, but it wasn’t long before valuations were off to the races again.  This cycle has repeated ad nauseum, but what if next time it’s different and we slide into a protracted deflationary environment?  It is almost incomprehensible, because the last time it happened was almost 100 years ago.

When something hasn’t happened for nearly a century, it is hard for the average person to plan for it.  We’ve mapped 100-year floodplains for safety purposes.  We know major earthquakes take place regularly, but on very long time scales.  Insurance companies and government safety regulations attempt to take these things into account.  But is anyone preparing you for a deflationary bust?

You might believe that the government can easily prevent a deflationary bust by printing money and would never let another Great Depression happen.  I prefer to trust in God, who says that “There is a time for everything” and “there is nothing new under the Sun.”  (Ecclesiastes 3:1, 2:9).  The Bible urges us to prepare, because “you do not know what disaster may come upon the land.”  (Ecclesiastes 11:2b).

My next article on the subject will discuss why a deflationary unwind is truly a disaster.

For further study, here is a list of Scriptures on investing.  For a broader spiritual view on investing, inflation, deflation, and other topics, read Faith and Finances or do the Building Faith and Finances course.