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| User Info | Why we will experience deflation; entered at 2007-12-02 03:14:37 | |||
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Nevertoolate Posts: 1222 Registered: 2007-08-26 San Antonio de Bexar de runover with illegals, Texas 
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Holding debt during deflationery times is preferable to owing debt. However, the outcome depends on two things: 1.)Will the debtor be able to continuing paying you on time/or at all with dollars whose purchasing power is going up (therefore making it more difficult to continue) and 2.)What is the quality of your collateral inasmuch as there is greater risk of repossession/foreclosure. Most people tend to prefer to have their dollars not invested and sitting on the sidelines (as KD said earlier "they must be enticed to loan") waiting for prices to severly drop (thereby giving them a much greater potential return than the rate of return on a loan. Final factor. One has to pay income tax on the interest earned. If you buy a tremendously deflated asset cheap enough, you don't have tax implications until you finally sell it as well as more total upside. In the late 80's my problem during the S&L crash was that what I thought was a "bargain" beginning with a 15% discount to its previous price, wasn't such a good deal because the price dropped about 70%. I boought an office building which (Sold for 219K in 88 and bought for 80K in 94. Today worth 360K) It took about 36 months to get into the beginning of the bottom and another 36 months to definitely start back out. Homes went down by 33%.(Much less because people have to live somewhere) Deflation is the destruction of dollars that were in circulation. Therefore you have fewer dollars chasing the same goods and services (ie there purchasing power goes up). Exact opposite of inflation (more dollars chasing goods and services).So to answer your question, would have I been better with an 80K note making 10% or buying a building at the bottom that had lost 70% of its value? Hope this helps. But it is only my take.
2007-12-02 03:14:37
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