The economy in 2020. Deflation, Hyperinflation and How To Profit from Current Economic Situation

Table of Contents

COVID-19 damages our economy and society. It creates huge deflation because of extremely reduced consumption. You will find why hyperinflation is possible in the near future and how to profit from it.

While the COVID-19 virus is extremely dangerous for our all health, at the same time it is dangerous for our society and economy. In fact, we should look at this very seriously because this virus already brought a worldwide economic recession if not a depression.

How can you use this coronavirus named COVID-19 to your advantage? Multiple investing opportunities emerged.

Current economic situation shortly

Coronavirus is a real so-called “Black Swan” event. “Black Swan” event is something that nobody has ever expected but it happened and it has a huge impact on our lives and the economy.

The stock market had its fastest crash in history. In fact, one day Dow Jones moved more than 3000 points down indicating the biggest single-day drop in the whole history!

If you think that this does not touch you, think again. The stock market shows how investors feel about the economy in the near future. If the stock market drops today, most companies around the globe will perform poorly in the near future.

The Dow Jones had its biggest point drop in history 2020
The Dow Jones had its biggest point drop in history

Bankrupcies and lost jobs

Thousands of companies will go bankrupt, not talking about hundreds of thousands of people who will lose their jobs in the coming days.

Think about traveling, transport renting industries, restaurants, bars, to name a few. All of them have no turnover these days.

As a consequence, the businesses have no money to pay the salaries for their workers while at the same time they need fewer workers because nobody buys their products – people around the world are quarantined!

Coronavirus fears cause fastest bear market yahoo finance
Coronavirus fears cause fastest bear market

In fact, most people these days have zero savings, have a lot of credit and can’t live even a few months without their current salary.

According to a survey in the US, 9% of individuals have been laid off already (March 2020) but the consequences of coronavirus will still be worse.

The consumption around the globe strongly decreases because millions of individuals are under quarantine. And nobody knows yet, for how long.

This reduction in consumption is exactly what pushes our already brittle economy into deflation.

The best part here is that deflation creates hundreds of opportunities to make a profit when the economy will recover. Unfortunately, it is not easy to time recovery exactly. Anyway, we might have some short-term recovery with such extreme money printing, but later we will drop again in long and painful depression.

Stay with me.

What is Deflation?

To profit from it, firstly you must understand what is deflation.

Deflation is a decline in prices of almost everything – resources, food and services. It is opposite to inflation where the prices of everything constantly increase. For the last 12 years we had very mild inflation (up to 2%) in most economies.

During deflation, everything becomes cheaper (including real-estate, gold, silver, stocks) and cash increases in value, because with the same amount of cash you can buy more over time. Governments around the world do everything to prevent the economy from going into deflation.

How bad is Deflation?

While you might think that deflation is good because cash increase in value and you can get more, in reality, it is very bad. Especially now, during the outbreak of COVID-19, deflation will touch everyone in the world.

Over-time, because of the decreased turnover of businesses, they must decrease salaries and then employees earn less.

When employees earn less, they spend less, thus the prices of goods and services decrease even further. It is because businesses decreases prices to sell something.

During Deflation

And the cycle continues. It is extremely problematic for individuals or companies which have debt. I am sure that every individual and company has some debt.

During deflation, the turnover of companies and salaries of the employers decrease but the credit payments stay the same. Each month it consumes a higher and higher part of your salary to pay the credit.

Deflation, in the short-term, makes everyone poorer and it is extremely painful when it happens.

Above all, deflation is good in the long-term and makes the economy healthy. If everyone (both rich and poor) becomes poor at the same time, then the economy restarts and a new, healthy economic cycle can start.

When does Deflation happen?

Usually, deflation starts because of reduced consumption (velocity of money) or contraction in the money supply, or both. On the other hand, an increase in one of them while another stays constant causes inflation. There must be always a balance of them to keep inflation slightly above 0%.

To proceed further you have to understand these two things and the graph below will help you. It is extremely simple and will take less than a minute.

Velocity of money

Let’s take an example of the US. The red line in the graph shows the money printed by the central bank of the US. As you can see, trillions of dollars were created over the last 10 years.

The same happened in Europe, China, Japan and some other countries too. In fact, the US multiplied the number of dollars in circulation they had in 2008 by five times just in a little bit longer than 5 years!

P.S. Look at that red spike at the right top corner. This is a response to coronavirus (data of March 18). This spike appeared before governments told that they will inject more than $2 trillion in the system. The red line will skyrocket in 2020.

On the other hand, a blue line represents the velocity of money (M1 – all currency held by the public). The velocity of money describes how many times the same dollar (or euro, or yen or other currency) was used in the economy to buy goods and services in one year. It mainly depends on demographics, people’s mood and expectations.

From the graph, it is clear that the velocity of money already decreased over the last 10 years. It decreases because of many different factors, but mainly because of the aging society, wrong government policies and increasing debt levels.

Because of the coronavirus, the velocity of money will drop almost in a straight line down. It is not shown in the graph yet.

Velocity of money (M1) vs Total US central bank assets (printed money)

Reasons for Deflation

The main reason for deflation in 2020 is decreased velocity of money. In graph above you can see, the velocity of the money drops already from the financial crisis of 2008.

Indeed, the velocity of money reached very low levels during the 2008 financial crisis. As a consequence, central banks had to start to print money to counteract the deflation to sustain their target inflation levels and to keep the economy growing.

Because of the COVID-19 in the world, people must stay quarantined at home. Thus, they do not consume many things they normally would.

For example, people do not travel, do not visit bars or restaurants, do not buy other goods and services.

Reasons for Deflation

This reduction in consumption very sharply and very fast decreased the velocity of currency and governments around the world must respond with actions.

Remember, deflation is a function of money supply and the velocity of money.

What is the response from the governments?

Money printing!

Governments response to COVID-19

In fact, currently, we have extremely reduced consumption around the world because of the virus spread and central banks try to pump new trillions into the system to prevent the economy from falling into extreme deflation.

Governments already promised to help everyone: banks, entire business sectors, individuals.

Look at the title below. FED will pump $4 trillion into the system. This number has 12 zeros, by the way. Furthermore, this is not the final value. Other countries around the world also print billions for their economies.

Financing programs for businesses hit by the coronavirus could amount to $4 trillion
Financing programs for businesses hit by the coronavirus could amount to $4 trillion

Different countries around the world, in one or another form, will create trillions of money to bail out hundreds of companies and individuals around the world.

Check below to a few screenshots of the headlines on the news (click to enlarge).

Extremely important to understand is that all these $4 trillion is a debt of the US (the same situation is in every country, just numbers are different), and the interest must be paid on it.

In fact, the percent of our taxes are used to pay that interest. The interest rate that is described in the next chapter defines the interest on printed money. With each printed dollar (or euro or other currency), the size of payable interest increases and thus more taxes go to cover the interest.

Basically, money printing makes all of us poorer, but the rich become richer.

Reduction of Interest Rates

Another weapon that governments have is “interest rates”. Interest rates define how expensive credit is (or money printing is). By reducing interest rates central banks try to increase borrowing and thus increase economic performance.

Many countries around the world decided, that interest rates must be lowered to extreme lows as fast as possible to encourage borrowing.

Governments made unscheduled meetings and cut interest rates to almost 0% as fast as possible. This extreme cut in interest rates at the same time allows governments around the world to print money extremely cheaply.

In fact, more than 39 countries already cut their interest rates and others will follow soon. Check the map below.

Emergency actions interest rate cuts in the world becasue fo COVID-19
Central banks around the world are in total panic these days. Extremely interest rates are almost everywhere

Interest rates, that were at historical lows around the world already, are going to almost 0% or even negative in some countries (Switzerland and Japan).

This has never happened in our history before and it is proved by many economists, that negative interest rates destroy the economy. In fact, 0% or negative interest rates ruin any pension and retirement funds.

Money printing

Did you know, that in order to create new dollars the government must borrow it from the federal reserve? The borrowing price is the interest rate. In other words, if interest rates are almost 0%, currency creation almost does not cost them anything!

In turn, central banks use this period with almost 0% interest rates to create new trillions.

The graph below is a great example, how central banks print money when interest rates are low. A red line is interest rates and blue line – printed dollars. When interest rates are at almost 0%, central banks start to increase currency supply.

This increase in currency supply will raise prices of goods and services for everyone.

Monetary base vs interest rates in the US 2020
Amount of money in circulations vs. Interest rates. In other words, the amount of currency in circulation in the economy versus the cost of currency creation. Becasue it is cheaper to create currency, central banks multiplied currency levels from 2008 a few times as minimum!

Our future

In my opinion, the central banks will overreact again with money printing and low-interest rates as it did after the 2008 financial crisis. I have nothing against help for businesses when it is extremely needed. However, it seems they will make the same mistake again and will overreact by creating too much money in the system.

Last time, the excess of the newly printed money did not create huge inflation, because the velocity of money was decreasing at the same time. In fact it decreases the last 12 years.

But, when the velocity of money starts to increase at one moment in the future (and it will), it will be extremely hard to change it.

Currently, the velocity of money during coronavirus is extremely low. Newly created money offsets the decrease in the velocity of currency.

Look at the graph below for the added lines. Arrows with dashed lines show how it likely to play out and what to expect.

Velocity of money (M1) vs Total US central bank assets (printed money). Dashed lines show very likely 2020 scenario, where velocity of money will start sharply to increase

Because inflation/deflation is a function of both above-shown values, an increase in both at the same time is highly inflationary! Inflation will rise and at one moment and even hyperinflation can happen.

You might think, how is it possible to change the velocity of money so drastically. Well, it is a purely psychologically driven thing.

In short, the velocity of money increases when people feel good and safe, they go and spend, they buy, they invest.

On the other hand, the velocity of money also increases when people lose trust in the currency and they want to get rid of it as fast as possible.

I am sure that the second reason will be the main reason for an increase in the velocity of money in the near future.

Forecast for near-term future

Most likely, we will have a short deflation (a few months long to a year) because people around the world are in quarantine and consumption is heavily reduced.

Then, the newly printed money by central banks will come into circulation and will counteract the deflation. At the same time, the quarantine will end and people will start to spend. The economy around the globe will slowly get back on its feet.

After a few years, around 2021-2022 or even later, we will have a really huge, second economic crash with extremely high deflation. The history of 1980, when two recession happened one after another in the US will most likely repeat.

At that time, central banks around the world will print money again. In fact, as they started in 2008 they barely ended it. They only increase and increase the amount they print. During the crash of 2021-2023, they will probably print a few hundred times more money than in 2020.

At the end of the second economic crash, or during, something should happen that will extremely increase the velocity of money.

In my opinion, people will lose their trust in the currency (be it a dollar, euro or any other) and this will be the catalyst for hyperinflation.

People will try to get rid of any dollars or euros because they will understand that with each day their owned currency worth less and less. Savers will be losers. In fact, everyone will try to spend their money as fast as possible. People will search for what to buy and where to invest.

Exactly same happened in Germany after WW1 when the German government printed so much money that prices were increasing a few times per day!

Hyperinflation in the near future is unavoidable.

What is Hyperinflation?

Hyperinflation is an increase in the prices of goods and services by more than 50% in a month.

Small inflation, a low increase in prices of goods and services (~2% increase per year), is normal these days and we don’t even feel it.

Over time, central banks around the world start to create money out of thin air. It is called money printing. They use this created currency out of nothing to buy real assets, such as bonds. Newly created currency enters circulation and will increase the prices of goods and services for all of us over time.

The mild increase in the price of goods and services is called inflation, where a very fast increase is called hyperinflation.

The hyperinflation scenario is not only my opinion. In fact, there are many economists, investors and other wealthy individuals who think exactly the same and started to prepare for this already.

While it extremely hard to time it properly, you can be sure that it will happen in the near future.

Look at the picture below. This picture is taken from the video series “Hidden Secrets of Money” created by Michael Maloney, where he explains the hyperinflation scenario.

Hidden secrets of money hyperinflation is coming
Hyperinflation is next. Red arrow shows our current position in 2020. Source: Hidden Secrets Of Money by Mike Maloney

The author of the graph above, Mike Maloney, predicted how the economy in western countries will collapse because of unlimited money printing in his book written in 2007: Guide To Investing in Gold & Silver: Protect Your Financial Future (<- Amazon link).

I highly recommend you read that book to find out how governments steal from all of us. Moreover, you will be able to understand the basics of economics and you will find it out how to use it to your advantage.

Is Hyperinflation possible?

The graph below shows how dollars in circulation (red line) varied over the last 70 years. It is clear that the red line is pointing upwards. The data of other currencies look very similar.

The blue line represents total assets bought by the Federal Reserve. Or simply, newly printed money. From 2008 FED printed a lot of money and it is stored as a reserve currency. It didn’t reach the circulation yet, but it will.

Over time, the red line will become steeper and steeper. The red line (currency in circulation) multiplied by the blue line (velocity of currency) is inflation. Governments try to keep it around 2%. It is not shown in this graph.

The point is, that all current data point to hyperinflation in the near future.

Total FED assets vs currency in circulation dollars in the US 70-year chart 2020
Total FED assets vs currency in circulation, dollars in the US. 70-year chart

How to profit from the situation?

Basically, there are three ways how to profit from the current situation. The good thing is, we still have some time (a few years) to learn, educate and prepare ourselves for coming investing opportunities.

It is either a financial investment or investment in yourself. In my opinion, everyone should make both.

Three ways to profit from current situation

1. Get physical gold and silver

The only way to survive during the hyperinflation without loss is to own physical gold and silver.

Moreover, during deflation gold price usually drops down and gold becomes cheap. It is a good investment opportunity because gold will only increase in value over-time.

Nowadays, every currency around the world is purely fiat currency and is not backed by any gold or silver. It means, that governments can create as much as they want of the new currency and this is exactly what they do.

Because of this, people will always be on a losing side and will see how their hard-earned currency (dollars, euros or other) loses value very fast.

However, by owning real, physical gold or silver, you can protect yourself, your family and your future. Furthermore, physical gold and silver are ideal long-term investments, they never lose value and can be gifted to your grandchildren.

Look at the figure below. History shows that all existed currencies in history lost their value over time against gold. Dollar, Euro, you name it, all currencies around the world lose their value against gold.

All major currencies depreciated past century relative to gold
All major currencies depreciated past century relative to gold

In fact, the nominal price of gold mostly follows inflation or deflation in the economy. You can find extremely detailed gold performance during inflation/deflations here.

In times of uncertainty, just like our next years will be, people seek real, hard assets and safe havens, such as gold.

I have collected 7 reasons why to invest in physical gold and silver in this article.

Shortages of physical gold and silver during coronavirus outbreak

In the middle of March 2020, gold and silver prices dropped and everyone started to buy physical gold and silver.

Just in a week, most physical gold and silver were sold out. Only expensive or not very liquid coins and bars left. This shows how important physical gold and silver really are.

That is why it is important to get some of the physical precious metals before such situations happen.

Where to get physical gold and silver?

Nowadays, physical gold and silver can be bought online just like anything else. On the other hand, you can visit any local gold or silver dealer.

However, from my experience I know, that local dealers usually take around 3% of the price you pay for your metals. Depending on the size of your purchase, simple shipping can be cheaper in most cases.

You can find more tips in this article: 12 Tips and Tricks for Investing in Gold and Silver.

It is also possible to buy physical gold and silver and store it insured in one of many vaults around the world.

I researched for my self and found great physical gold and silver brokers around the world, that have the best price and customer satisfaction ratio.

Go check the current gold and silver price by yourself. Click the broker name below to open their websites.

GoldSilberShop (Germany). Click to open GoldSilberShop website or review about the company.

Regal Assets (US, UK, UAE and more). Click to open Regal Assets website or review about the company.

BullionStar (Singapore). Click to open BullionStar website or review about the company.

GoldBroker (Offshore investment, minimum 10k). Click to open GoldBroker website or review about the company.

2. Economic sector that might rise

It is clear that some sectors in the economy will perform better in the next years than others.

For example, the housing sector in western economies will not increase in value so much anymore as it did in the last 20 years. The reason is that the smaller generation follows a bigger generation and they will not require so much housing.

Some commodities, like copper or uranium, can perform really well in the long-term. However, it is extremely hard for any person, without years of experience, to understand what sectors will be profitable.

The company called Capitalist Exploits solves this problem by providing detailed investment reports every week to your email. They give you all the collected data where, why, when and how to invest to get the maximum gains. Furthermore, they always aim at a minimum of 3x gains.

The owners of Capitalist Exploits also invest in the same trades as they offer for their clients. Check examples of their investing ideas by yourself.

Detailed review about Capitalist Exploits you can find in this post: Capitalist Exploits Review 2020.

If you are trader

These days volatility in the stock market insane! Some stocks or indices do moves that cannot be logically explained.

In such a market, swing traders or day traders have a lot of opportunities to make some fast profits. However, filtering of the stocks is a time-consuming task.

I use software Trade Ideas to filter stocks for my self. For example, you can ask software, to show you the stocks that just reached a 90-day low, broke through resistance or stocks which just moved above the 200-day average. Everything in real-time. There are thousands of filters you can apply and you can combine them.

This software saves a lot of time, because you need less to time research yourself. Moreover, the software even allows you to use Artificial Intelligence for trading. Check by yourself – Trade Ideas.

3. Educate yourself

The most important investment is your education. Learn high-income skills that can be used in various situations, including work, friends and family.

These days, during coronavirus outbreak, it is a perfect time to spend a few hours per day to learn new skills and widen your knowledge.

High-income skills, such as sales, copy-writing, leadership, will help you in every aspect of your life. Moreover, you can learn them from books, the internet or youtube and after quarantine will end, it will be the best time to practice them.

Below I would like to give you a few high-value sources that you must know.

Learn how to sell a product and send a message to the public. Everything about sales and mindset – Youtube channel Dan Lok.

Entrepreneurship, leadership and motivation – Youtube channel Valueintment by Patrick Bet David.

Improve your habits and become more productive – Book: The 7 Habits of Highly Effective People written by Stephen R. Covey.

Understand how the economy works and how to use it to your advantage – Youtube channel GoldSilver with Mike Maloney

Learn to invest, generate passive income and understand taxes – Youtube channel The Rich Dad Channel by Robert T. Kiyosakin.

It does not cost a lot of time to check them. I am sure that you will like at least one.

In conclusion - take the best of this period

Nobody expected anything like we currently have. Almost the whole world is quarantined, in the 21st century.

The consumption strongly decreased and thousands of businesses will go bankrupt in the next months. In turn, deflation will start and we will notice drop in prices of goods, assets and services. Unfortunately, in the process, millions of workers will lose their jobs.

Because you can’t change anything, you can use this period to your advance. Spend time with your families, improve your habits, learn new skills. At the same time, think about investing opportunities that this period already brought and will bring later.

Written by R. Mitkus

Share with friends

Share on facebook
Share on linkedin
Share on whatsapp
Share on twitter
Share on email
Share on telegram

Recent Posts

Do you like what you read? Share this post with your friends!

Share on facebook
Share on linkedin
Share on whatsapp
Share on twitter
Share on email
Share on telegram

Subscribe and get notified about newest content