Price Downtrend: A Difficult Situation for the Economy and Opportunities for Smart Investors

Phenomena That Many People Still Don’t Understand

Have you ever wondered why, during an economic downturn, prices of goods fall but our lives actually get worse? That’s because of Money Deflation (Deflation) – a phenomenon where the prices of goods and services decrease continuously, creating a negative economic cycle.

Unlike inflation, where the value of money decreases, deflation causes the value of money to increase – oh, that sounds good, right? Not always.

Where Does Deflation Come From?

The main causes are twofold:

Demand Side: When people buy less, possibly due to unemployment, high debt, or low confidence in the economy, businesses must lower prices to motivate buyers. But this further discourages people from purchasing, waiting for even lower prices – creating a vicious cycle.

Supply Side: Advanced technology sometimes reduces production costs, leading to lower prices. This is a “good” deflation, but it occurs very rarely.

During the COVID-19 crisis, Thailand faced a major deflation in April 2020, with a deflation rate of -2.99% (year-over-year) – the worst in 10 years and 9 months.

Who Benefits and Who Loses?

Here’s an interesting point:

Beneficiaries: Those with fixed incomes (bank employees, government officials), and creditors, because their purchasing power increases; one baht can buy more than before.

Losers: Debtors (with real value debt increasing), entrepreneurs, shareholders, because profits shrink as they sell at lower prices.

The Impact on the Economy Can Be Severe

Imagine this: companies see weak demand, reduce production → lay off workers → unemployment rises → less purchasing → prices fall further → entering an endless loop.

Extreme example: The Great Depression in the US (1929-1932)

• GDP declined by 15%
• Unemployment reached 23% (some countries 33%)
• Agricultural prices fell over 60%
• International trade dropped by 50%

The effects lasted until World War II.

What Should Investors Do During Deflation?

Deflation isn’t all bad news – it can be an opportunity for those prepared:

1. Hold cash and wait for the right moment
Cash increases in value during this period. In 6 months, you might buy assets 20-30% cheaper.

2. High-quality bonds
When central banks cut interest rates, existing bonds increase in value. Choose bonds from trustworthy issuers.

3. Stocks of food and essential goods companies
Demand remains steady even during deflation. Select companies with strong cash flows.

4. Real estate in prime locations
The market may surge if you have liquid funds. This is the time for a big move.

5. Gold
An asset that escapes uncertainty. During deflation, prices may behave differently from stocks. You can trade CFDs with small amounts to speculate on both upward and downward movements.

Deflation Measures: The Role of the Government

The government must intervene, or the economy will truly collapse:

• Lower interest rates to encourage borrowing and spending
• Increase liquidity by purchasing assets and reducing debt
• Cut taxes to give people more disposable income
• Support employment to increase people’s income
• Reduce utility costs (electricity, water)
• Public investment to stimulate the private sector

Summary: Deflation Is a Real Phenomenon

The global economy in 2023 faces risks of entering deflation, indicated by the continuous decline of the Global LEI, coupled with the Russia-Ukraine war, cost of living crises, and energy crises.

Don’t think it won’t affect us. Prepare yourself:

1. Build savings
2. Study assets with stable returns
3. Understand causes of deflation and investment strategies during this period
4. Don’t bet everything; diversify risks

Smart investing isn’t about predicting prices accurately but about knowing how to protect yourself and seize opportunities when they arise.