Any trader has repeatedly heard or read about the fact that constantly invest is necessary not only in order to earn, but also in order not to lose money, because they are "eating" inflation, but what is it? Can we benefit from this process? And also, how in this case to behave in case of deflation? These and other issues are discussed in this article.
What do these concepts mean?
Money, as well as any other product has a price and it is natural, because money, oddly enough - the same product as others, just more standardized and used to buy all other goods. Thus, inflation is a decrease in the value of money, and deflation is the opposite.
Let's imagine that for 10 rubles today you can buy M goods, and tomorrow 2M. It would seem that the amount is the same, but the goods are twice as much - this is deflation. But it is worth noting that it is possible to talk about inflation or deflation only in the case of direct changes in the value of the money itself, and not the price of one or another product. After all, if tomorrow the price of oil falls, and for the same amount instead of a barrel you can buy three, it is not deflation, but just a fall in the price of black gold.
Is it good or bad?
It's a strange question, but I'll try to answer it. For the investor is not bad or good, because he earns not on growth or fall, but on the direct swaying of the market and economy. Michael Burry was able to make a fortune on the 2008 crisis, can we say it was a negative event? For the economy and the market - certainly, but for individual investors - not always.
Thus, inflation - adversely affects your deposits and literally eats up your money, if you have so far chosen a wait-and-see attitude, but almost does not affect the shares of companies, because along with inflation will grow the value of this or that asset. In deflation, on the contrary, deposits and holding funds - a good strategy, and buying government bonds - extremely profitable occupation, but businesses and business - suffer, as well as quite unprofitable can be buying goods.
How to predict inflation or deflation?
The main source of information about possible inflation or deflation is news, and the priority of news about public financial policy, especially if you earn in short positions. Remission or issuance of money by the state, increase or decrease in tax rates and more may indicate a short-term strengthening or fall of the currency.
But it is necessary to be extremely careful in earnings on such global economic processes, because you need not only to earn, but also to get this money, and in crises and hyperinflation or deflation to do it is not so easy, because with the fall of the economy, as the house of cards can fall and banks, and the exchange, which were to pay you your earnings.