## When Money Contracts, Investors Need to Know Why They Invest

During times when the prices of goods and services gradually decline, the economic signals are warning us that we may be entering a period of deflation or monetary contraction. The problem is that most investors still don't know what to do. Let's clarify this issue and learn how to apply it practically.

## What is Deflation? How is it Different from Inflation?

When we talk about deflation or monetary contraction, it refers to a situation where the overall price level continuously decreases. This phenomenon is the opposite of inflation (inflation) that we have heard of.

During deflation, the value of the same amount of money increases in purchasing power. For example, with 100 Baht, you could buy 2 items before. After deflation, with the same money, you can buy 3 items instead.

But what you need to understand is that a decrease in prices means the overall average declines. It doesn't mean all goods become cheaper. Some items may still be expensive, while others decrease more significantly.

## When Does Deflation Usually Occur?

Deflation mostly occurs during periods of economic downturn, supported by several factors:

**From the supply side:** When production suddenly increases or technological advances reduce production costs, producers lower prices.

**From the demand side:** When purchasing demand decreases due to waning consumer purchasing power or increased personal debt burdens, unemployment rises, and financial institutions tighten credit.

**Due to policy mistakes:** When the government imposes excessive taxes, reducing the cash reserves of the central bank, or implements fiscal policies that oppose market needs.

**Capital outflows:** When money is continuously sent out of the country, leading to liquidity shortages.

## Historical Warning: The Great Depression

The United States experienced the most severe deflation during The Great Depression (early 2515 BE), when the stock market plummeted sharply on September 4, 2515 BE, known as "Black Tuesday."

The impacts were alarming: global GDP fell over 15% in just 3 years, international trade volume dropped more than 50%, US unemployment soared to 23%, some countries reached 33%, and agricultural prices fell more than 60%.

These negative effects persisted until the early stages of World War II, demonstrating that severe deflation can cause long-term damage to the economy.

## Is Recession Related to Deflation?

Yes. When the economy enters (recession), meaning GDP declines for two consecutive quarters, economic activity slows, consumers have less money to buy goods, and businesses must lower prices to stimulate sales.

The danger is that when people see prices falling, they tend to wait for even lower prices. Businesses then continue to cut prices, creating a deflationary spiral that deepens economic stagnation. As companies cut costs, they lay off workers, increasing unemployment and reducing purchasing power further.

## Thailand's Situation: Last Bastion or Already Over?

Based on the general inflation rate in Thailand, which has been negative for several consecutive months since April 2020, decreasing by 2.99% (YoY), some might think Thailand has entered deflation.

However, analysts from the Bank of Thailand indicate that the country does not fully meet the definition of deflation because:

- Although inflation is negative, it has not continued to decline; recent trends show it rising from -1.7% in 2020 to 0.9% in 2021.
- Most goods (about 70%) remain at the same or higher prices, with only some items decreasing.
- The global Leading Economic Indicator (Global LEI) shows a downward trend, and 2023 may face increased recession risks, which requires close monitoring.

## How Deflation Affects Different Scenarios

**Who Benefits**

Those with fixed income and creditors. Their cash holdings gain purchasing power. Creditors benefit because debtors need to spend more cautiously to repay debts.

**Who Loses**

Businesses and consumers. Spending decreases, profit margins shrink, some companies cut employment, leading to higher unemployment. Those earning from profits and debtors also suffer.

## How Can the Government Address Deflation?

**Monetary Policy:**
The central bank reduces policy interest rates to encourage banks to lend more, decreases banks' cash reserve requirements to inject more liquidity into the economy, and purchases market securities to increase financial liquidity.

**Fiscal Policy:**
Lower taxes to leave more money for consumers, run budget deficits, increase government spending on utilities like water and electricity to ease burdens, and support investments in public and private sectors to create jobs and circulate money.

## What to Invest in During Deflation

**Option 1: Hold Cash**
In deflation, cash gains purchasing power. Holding cash is more valuable, and it provides opportunities for investors ready to buy stocks when prices are lowest.

**Option 2: Bonds**
When the Bank of Thailand lowers interest rates, the value of existing bonds (with higher interest rates) increases. The key is to choose trustworthy bonds to avoid default risk.

**Option 3: Strong Stocks**
Not all stocks fall equally. Companies with resilient business models may not see significant price drops. Invest in essential sectors like food, water, medicine, and housing, as demand remains steady.

**Option 4: Real Estate**
In deflation, many homeowners rush to sell, leading to price reductions. Investors with surplus funds might buy property for speculation, waiting for economic recovery.

**Option 5: Gold**
Gold prices often move with the overall economy, but gold is an asset with intrinsic value. Investors can buy gold cheaply now and wait for economic recovery.

One popular method is trading CFD gold, allowing traders to speculate on price movements without owning the physical asset. Just open an account with a CFD broker, download the trading platform, and start.

**Option 6: Short Selling Stocks**
This method is less common but involves borrowing stocks to sell, then buying them back at lower prices when the stock declines, profiting from the difference.

## Accounting Strategies During Deflation

To navigate this period successfully, do these three things:

**First:** Find assets that make money valuable again.
In deflation, cash is king. Save it so you can invest when prices are right.

**Second:** Study diversification.
When the economy is volatile, don't put all your money into one option. Diversify your portfolio, e.g., 40% cash, 30% stocks, 20% gold, 10% bonds.

**Third:** Cut losses early.
Set a Stop Loss level before investing. When losses reach that point, exit immediately—don't wait for deeper losses.

## Summary: Deflation Is Not the End, But a Turning Point

While deflation is undesirable, it is not the end of the economy. It tests financial management skills.

Those who understand deflation principles and have clear investment plans often emerge better from this phase. Some even profit. Meanwhile, those who act randomly may already have suffered losses.

The key is knowing what to invest in, where, when, and when to withdraw. That is the hallmark of a smart investor.