## When the salary increases but prices decrease? What is deflation and how to invest

### Deflation—an issue not to be overlooked

**Deflation** is a situation opposite to inflation. During good economic times, we worry about money losing value, but when deflation occurs, the problems are different—prices of goods and services continuously decrease, and our money's purchasing power increases. Sounds good, right? But in reality, it’s much more complicated.

When **deflation** happens, the overall price level of goods and services drops—not just some items but generally. Meanwhile, the value of money rises, making it seem like we can buy more. It’s like 100 baht today can buy as much as 110-120 baht did before.

### When does the economy enter a crisis?

When GDP declines for two consecutive quarters, key indicators start flashing red. During the global response to the COVID-19 crisis, Thailand saw a gray economic picture. The consumer price index (Headline CPI) decreased by -2.99% (YoY) in April, the sharpest contraction in 10 years and 9 months, due to restrictions on economic activities, reduced demand for goods, and falling oil prices.

In the US, history records "Black Tuesday" in 1929 when the stock market crashed severely. Between 1929-1932, global GDP shrank by 15%, leading to mass unemployment. Unemployment in the US soared to 23%, and some countries reached 33%. Agricultural product prices plummeted by 60%. That was a disaster.

### Where does deflation come from?

Multiple factors contribute, including money supply, demand, production efficiency, and failed government policies.

**Demand side:** People buy less, whether due to increased household debt, reduced net income, unemployment, or just becoming more savings-oriented. Suddenly, demand drops. Entrepreneurs start thinking that even full-capacity factories won’t sell out, leading to excess stock and price cuts.

**Supply side:** Technology upgrades, improved production efficiency, and lower costs naturally lead to cheaper products.

**Money system:** Central banks tighten money supply, credit becomes scarce, and circulation in the system is insufficient. Rural areas lack cash.

**Faulty policies:** Excessively high interest rates, heavy taxation, or restrictive lending policies.

### Who are the victims? Who benefits?

This is a clear zero-sum game. Those with fixed salaries and creditors benefit—because money gains value. When salaries are transferred, they get more real value.

But merchants, small entrepreneurs, common shareholders, and debtors—these groups are hit hard. Businesses see declining revenues, profits vanish. Those who borrowed to invest during boom times? Now, the principal remains the same, but income doesn’t come in.

### The downward spiral—an unstoppable cycle

This is the biggest problem. People think, "Prices will fall further, I’d better save money," and stop buying. Entrepreneurs see demand shrink, decide to lay off workers or cut wages. Unemployment rises, purchasing power drops further. Businesses lower prices to attract buyers, creating an endless cycle.

The interconnected effects—economic overheating, low employment, empty hotels, closed shops, and some businesses disappearing altogether.

### What to invest in during deflation?

This is an opportunity. Although deflation can occur multiple times, with high risks, the returns can be significant if you choose wisely.

**1. Bonds** – Central banks may lower interest rates, increasing the value of existing bonds. Investing in highly credible bonds provides steady returns and is safer.

**2. Strong stocks** – Overall stock markets decline, but companies with essential, profitable businesses stand out. Focus on stocks in food, utilities, and daily necessities, based on trend analysis and data, rather than risky speculative bets.

**3. Real estate** – Prices drop, and many need to sell urgently. Those with savings can buy at lower prices. When the economy recovers, prices tend to rise again. But careful selection of locations and planning are essential—avoid random investments.

**4. Gold** – An asset whose intrinsic value doesn’t change. Prices fall across the market, so buying during downturns and selling when prices recover can yield profits. It also helps diversify investment risk.

**5. Cash** – Remember, during deflation, cash is more valuable. Keep money on hand or set limit orders to buy assets at lower prices. Don’t fear missing out; many asset prices will be cheaper.

### How can the government fix this?

Central banks can lower interest rates, relax regulations, and increase liquidity, making borrowing easier. Companies can access funds for investment and hiring.

The government can expand budgets, run fiscal deficits, cut taxes, and put more money into people's hands to boost demand. Entrepreneurs will resume production.

Reducing water and electricity costs helps ease household expenses.

Supporting investments in both public and private sectors creates jobs and stimulates demand.

Purchasing assets and corporate bonds injects money into the system.

Unleashing liquidity allows money to circulate back into the economy.

### What’s not taught in textbooks

Deflation isn’t a distant or abstract concept. As salaried workers and small employees, we must prepare because when it happens, wages may lag behind the talk of cuts, houses may be foreclosed, and profit margins shrink. Some may even lose their jobs.

However, besides panicking and shrinking, we have options: plan our finances to be resilient, save enough money, learn about credit houses, invest in systems rather than relying solely on salaries, and invest in valuable businesses or assets. When markets decline, other strategies become available.

The economic cycle fluctuates. Careful, prepared, and strategic individuals are safer than those who sit idle and let the cycle pass by.