Wealth Blog

Finance Blogs » Wealth » Does deflation benefit the rich?

Does deflation benefit the rich?

By Judy Martel · Bankrate.com
Friday, August 13, 2010
Posted: 2 pm ET

In the unlikely event of deflation, would the widening gap between rich and middle class worsen?

Let's start with two tenets of deflation:  

  1. The value of money increases as prices for goods and services drop.
  2. The value of a loan's interest rate effectively goes up, since you are paying for an item (a home, for instance) that has decreased in value. So your debt-to-equity ratio increases.

During periods of deflation there is not enough money in circulation, and the opposite is true during periods of inflation. When a country experiences deflation it usually has been preceded by a recession or depression, with low production and high unemployment. For those reasons it has a far more damaging and long-term effect on the economy than inflation, which encourages short-term consumption.

Deflation is bad for everyone, but it could hurt some more than others. At the simplest level, those who rushed headlong into debt will suffer more during a deflationary period more than those who didn't. As the saying goes, "cash is king."

If you're a holder of the so-called "smart money," you could put it in circulation and buy at reduced prices. If your net worth is tied up in real estate and stocks, you'd be losing ground, especially if you used leverage to buy at inflated prices.

Not all the wealthy, of course, stockpile cash. In fact, many of them jumped on the real-estate gravy train when times were good and credit was loose. But for those who kept a significant amount of what money managers call dry powder (cash) on hand, they could benefit during a period of falling prices. And, they would be putting money into circulation.

For those who didn't hoard cash and took on lots of debt, consider this a warning to reduce debt as much as you can.

Do you think deflation could widen the gap between rich and middle class?

Keep up with your wealth and follow me on Twitter.

Sign up for our newsletter on CD & Investing News.

«
»
Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
8 Comments
vroom259
August 24, 2010 at 9:00 am

Leftism is driven by envy and hatred of the rich rather than any genuine concern for the poor or even the middle class, and this hatred is what drives them to destroy capitalism - a system which steadily improves the wealth of all of its participants over the long run. The current economic collapse is a result of such leftist manipulation.

For decades liberals complained that the poor, blacks and women were being discriminated against by lenders. Liberals then forced lenders to give loans and credit to people who could not qualify otherwise. Such subprime borrowers inevitably could not honor their loans or pay back their credit cards (of course claiming they were "deceived" by the big bad banks). This is what brought down the entire economy - not wall street or the rich.

Samatt
August 22, 2010 at 9:53 pm

We're in the middle of a devasted economy caused by the failure of supply-side economics that goes back over 30 years. The deregulation and no regulation of institutions and corporations, with the idea being that it is in the best interest of industries to regulate themselves.

We all now know that greed trumped common sense.

Most all regulation that was on our banking system since the Great Depression was removed to help growth.
Because of that deregulation, we are in the Great Recession.
"Those who forget the past are doomed to repeat it."
What happened and is still happening is a form of Corporate Socialism.

Economic Facts:
The central bank(Federal Reserve) can deficit spend as much as it wants and it does NOT owe itself.
It is NOT taxpayer's money, it's the central bank's.
The central bank is unlike a buisness, a state, a county, a city or an individual in that it does not need revenue or has to borrow to spend.
The treasury sells bonds/treasury notes to anyone or any nation but only in US dollars. Some people call this borrowing but it is not accurate.
The treasury only prints money for cash transactions and pocket change and not everytime the central bank spends.
The central bank spends by crediting bank accounts.
The ONLY negative fron deficit spending is the possibility of inflation.

These facts are sometimes difficult for people to understand, since most of us were never taught economic facts but only theories instead. There is a lot of incorrect information, including propaganda, about how the central bank of a sovereign nation works.

Rose B
August 22, 2010 at 12:15 pm

Yes, American DO consume more energy per person than people in poorer countries. 1) Rich people just do use more energy, and 2) Americans are quite spoiled with past energy gluts, and are not willing to think seriously about living well on less energy, and 3) companies can use less energy in getting work done with American workers, particularly in the case of sales and customer care, which can be dome by telecommuting.

Americans are ALL rich people, by comparison with many others. Even our "poor" own televisions, cars, and other nifty possessions. And few of our poor are hungry, reduced to rags, or without shelter. Notice that those nifty gadgets use energy. Don't bother saying I know nothing about "the poor" in America, because I've been there.

I talk to people often about various ways to use less energy, and the typical reaction is "yuck!" Switch from disposables to reusables? "oh, unsanitary" never mind that the disposables hang around in landfill for centuries, while wash-and-reuse separates different components so each can be processed cleanly. Recycle beverage containers? That too is a hard sell, although it is the law in my state. Nor do people want to drive fuel efficient cars or adopt efficient driving practices. Replace the lawn with a garden or with no-mow ground cover? "But a lawn is so pretty!" Americans as a group are all for forcing industry to cut energy waste and pollute less, but they will not change their own comsumption behavior. Since manufacturers make what sells, consumer behavior is the driver of industrial pollution as well as the source of non-industrial pollution.

I know quite a bit about telecommuting, because that is what my husband did before he became unemployed. I also know that when I buy insurance, I'm very likely to talk to a home-based agent. Most of the things that involve people connecting by telephone or computer can be done without the massive brick-and-mortar calling centers. Telecommuting saves heaps of energy, and saves companies money too. People who work from home don't use as much gasoline, use the same heating/cooling as is running in their home anyway, eat more meals from scratch (less container waste), and so on.

Kitchen Sinic
August 21, 2010 at 7:58 am

Everything widens the gap between the very rich and everybody else.

Linda in California
August 19, 2010 at 1:48 pm

Outsourcing jobs to reduce our energy consumption? Hah -Gumby needs to stop hanging around with Pokey!

We outsourced jobs in my opinion because of trying to compete with others who have slave labor and manipulate their currency. Secondly the corporations that did it only care about their bottom line and got greedy. The products being imported by one of the largest is mostly all junk. We gave up our jobs when we gave up caring about our own country and quality.

Whatever happened to Obama giving incentives to U.S. companies and penalizing the corporations who took it over seas?????

Gumby Koontz
August 18, 2010 at 12:22 pm

The Federal government is in deep hock of $13 trillions. It needs every excuse to get the 10 and 30 year Treasurys much lower than 2 - 4 % to probably 1-3 % or less so that it can handle the debt easier. We have deflation chiefly because of high unemployment due to energy shortages.. We are outsourcing jobs to reduce our energy consumption.. Workers overseas dont consume one fifth as much energy as an average American..

Gumby Koontz
August 18, 2010 at 12:20 pm

The Federal government is in deep hock of $13 trillions. It needs every excuse to get the 10 and 30 year Treasurys much lower than 2 - 4 % to probably 1-3 % or less so that it can handle the debt easier. We have deflation chiefly because of high unemployment due to energy shortages.. We are outsourcing jobs to reduce our energy consumption.. Workers overseas dont consume one fifth as much energy as an average American .

tronto
August 16, 2010 at 4:51 pm

the article should include what to do with the cash we have saved during inflation or in this case deflation

thanks