## Between Deflation and Investment Opportunities: Causes of Deflation and Strategies Investors Must Know

### When prices of goods start to decline: What is deflation?

**Deflation (Deflation)** is the opposite of inflation, characterized by a continuous decrease in the price levels of goods and services while the value of money increases. During this period, your purchasing power rises if you hold cash.

Entering a deflationary period does not mean all goods become cheaper, but rather that the overall average prices in the economy decline. This differs from typical market sales where only some items are discounted. Deflation is a systemic phenomenon reflecting economic contraction.

### Causes of Deflation: What are the main factors?

**Causes of deflation** stem from an imbalance between supply and demand in the economy, divided into two main aspects:

#### Supply Side (Supply Side)
When there is an excess of goods and services beyond market demand, producers are forced to lower prices. This may result from:
- Rapid increases in productivity
- Technological advancements reducing production costs
- Countries capable of exporting at lower prices

#### Demand Side (Demand Side)
A significant decrease in consumer purchasing demand due to:
- Rising household debt reducing spending capacity
- Increasing unemployment rates lowering income
- Tightening of credit by financial institutions
- Consumer paranoia leading to savings rather than spending

### Pathways to Deflation: From monetary policy to economic crisis

Deflation often occurs during recession periods, which may be caused by:

**1. Policy mistakes in monetary and fiscal measures**
Governments or central banks may raise interest rates excessively, discouraging lending. Additionally, high taxes or restrictions on government spending can reduce money circulation in the system.

**2. Outflow of foreign capital**
When foreign investors or exporters withdraw funds over a prolonged period, the money supply in the system decreases, leading to higher interest rates and sluggish domestic investment.

**3. Decrease in money velocity**
If the amount of money circulating in the economy is insufficient relative to its size, prices tend to rise. This can happen if people prefer saving over investing or if the government prints insufficient currency.

**4. Unemployment cycle and declining demand**
When businesses see reduced demand, they cut production and lay off workers. Unemployed individuals have less income, leading to decreased purchasing, which further reduces sales for other businesses, creating a contagion effect.

### Case Study: The Great Depression and lessons from the global economy

"The Great Depression" (1929-1932) was one of the most severe deflationary crises in history, triggered by the collapse of the US stock market on "Black Tuesday." This contraction had worldwide impacts:

- Global GDP shrank by over 15%
- International trade declined by more than 50%
- US unemployment reached 23%, while other countries hit 33%
- Agricultural commodity prices fell by over 60%
- The crisis persisted until the onset of World War II

The lesson from this crisis is that monetary policy mistakes can cause long-term damage to the global economy.

### How does deflation affect daily life?

When the economy enters deflation, the impacts are uneven, revealing who benefits and who suffers:

**Beneficiaries:**
- Salaried workers (salary), as their money gains value
- Creditors, because they can collect loans worth more
- Cash holders, due to increased purchasing power

**Those at a disadvantage:**
- Entrepreneurs and business managers, as sales decline and profits shrink
- Shareholders, as asset values decrease
- Debtors, because their debt's real value increases and repayment becomes harder
- Unemployed individuals, facing difficulty finding jobs

### When the economy contracts, where do investment opportunities arise?

Although deflation is generally "bad" for the overall economy, experienced investors can find opportunities by increasing cash holdings in their portfolios and waiting for the right timing.

#### Bonds (Bonds)
During deflation, central banks often lower interest rates to increase liquidity. Buying bonds in this period may yield lower returns but remains safe and stable. It is advisable to choose high-quality bonds (Investment Grade) and from reputable banks or companies.

#### Equities (Equities)
In deflationary periods, stock prices tend to fall. However, key characteristics include:
- Selecting companies with consistent profits from essential goods/services such as food, beverages, and other necessities
- These companies tend to remain stable even during economic downturns
- Known as "Defensive Stocks" — stocks resistant to economic decline

#### Real Estate (Real Estate)
In deflation, some property owners may need to sell urgently, causing prices to drop. This presents an opportunity for investors with sufficient capital, but requires choosing good locations and planning for the long term, as property sales can take time.

#### Precious Metals (Precious Metals)
Gold is considered a "Safe Haven" during uncertain economic times. During deflation, gold prices often do not fall significantly and may even rise, as investors seek to preserve value.

### Investment Strategies During Deflation

**1. Portfolio Allocation (Portfolio Allocation)**
Avoid putting all risk into a single asset class. Diversify among:
- Cash 20-30%
- Bonds 30-40%
- Defensive stocks 20-30%
- Gold and protective assets 10-20%

**2. Dollar Cost Averaging (DCA)**
Instead of large lump-sum investments, divide investments into smaller parts over multiple occasions. This reduces timing risk.

**3. Short Selling and Put Options**
For experienced investors, short selling stocks or buying put options can profit from downward markets. These instruments carry high risk.

**4. CFD Trading for Flexibility**
CFD trading allows you to:
- Speculate on both rising and falling markets without owning the underlying assets
- Use leverage to maximize returns (but also increase risk)
- Trade 24/7 across various asset classes

### Government Measures: How to address deflation

When deflation occurs, governments and central banks often implement the following measures:

**Monetary Policy:**
- Lower interest rates to make borrowing cheaper for individuals and businesses
- Reduce reserve requirements to increase bank lending capacity
- Purchase securities and corporate bonds to inject liquidity (Quantitative Easing)

**Fiscal Policy:**
- Cut taxes to increase household spending
- Increase government expenditure (Deficit Spending) to create jobs and fund projects
- Reduce utility costs to lower living expenses and boost purchasing power

### Current Thai Situation: The role of economic indicators

Thailand’s inflation rate may have been negative in recent months (March 2020 at -1.7%), but this does not mean the country has entered deflation, as latest data shows:

| Indicator | 2020 | 2021 |
|------------|-------|-------|
| Overall inflation rate | -1.7% | +0.9% |
| Crude oil prices | -55.3% | +5.4% |
| GDP growth rate | -8.1% | +5.0% |

In reality, about 70% of goods and services in Thailand have stable or rising prices, and inflation expectations (5 years ahead) stand at 1.8%, within the target range of 1-3%.

### Looking Ahead: What investment options are suitable?

For investors concerned about deflation, initial recommendations are:

**Short-term (3-6 months):**
- Increase cash holdings
- Trade CFDs to profit from volatility
- Focus on defensive stocks

**Medium-term (6-12 months):**
- Manage a balanced portfolio
- Invest in quality bonds
- Start accumulating gold

**Long-term (1 year or more):**
- Gradually invest in real estate during price declines
- Choose stocks with long-term growth potential
- Build additional income streams

### Summary: Deflation is not the end but a new beginning

**Deflation** is a challenging economic condition but not catastrophic. While fixed-income earners and creditors benefit, entrepreneurs and debtors face difficulties.

The key is **preparation** through financial planning, diversification, and monitoring economic indicators. Understanding **causes of deflation** helps you grasp the deeper economic structure and make smarter investment decisions.

Ultimately, patient and well-planned investors often profit significantly when markets return to normal, as they do not panic during crises but see them as opportunities to buy.