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The vulnerability of the economy and the personal budget to inflation is obvious to everyone. But deflation, which at first glance may seem attractive to some, also has adverse effects, especially when a deflationary spiral begins. Therefore, it is useful for both investors and people who live paycheck to paycheck to know what to do in such a situation.

What’s Wrong with Price Drops?

Deflation is a mirror image of inflation because instead of a steady rise in prices, there is the same continuous fall. It is different from regular seasonal price cuts for certain commodities, such as fruits and vegetables, because deflation has negative long-term effects:

  • When consumer demand falls, manufacturers begin to accumulate excess goods.
  • Retailers and manufacturers are forced to cut prices to sell at least part of the inventory.
  • Seeing that prices are falling, buyers are in no hurry to make purchases, hoping that prices will fall even more.
  • Faced with a crisis of overproduction, manufacturers are forced to reduce production and lay off part of the workers
  • Unemployment further reduces demand, and with it, the deflationary spiral unwinds even more.

What Deflation Means for Debt Payments

Anyone who meets a deflationary period with debt is quite unlucky because they will pay more than before. For example, you borrowed $100 and must pay it back with a certain percentage:

  • If the economy is balanced, you give back about the same value you used when you borrowed money.
  • If a deflationary spiral has unfolded, then the money you return is now worth more, because you can buy a lot more goods with it than before.

What to Do During the Period of Deflation

In any situation, there is not only a losing side but also a winning one. Therefore, if you know how to turn a loss into a profit, you can benefit even from such a difficult situation:

  • When many companies lose profits in times of deflation, there are still businesses with stable cash flow. These are those that produce essential goods, the demand for which does not fall. Therefore, investing in this sector of the economy will protect your capital from loss and give even a small but steady profit.
  • Manufacturers of durable products are in a less favorable situation because consumers postpone the purchase of this particular type of goods for later. Therefore, they are forced to significantly reduce prices. At the same time, there is a unique chance for consumers to purchase goods that they may not have even dreamed of at a low price, such as furniture, household appliances, and even a car!

How to Take Advantage of Deflation’s Opportunities

If you do not have enough funds to make such a major acquisition, you can take a payday loan. It will be better than postponing the purchase until payday because a trend reversal may occur, and the price of the product will creep up again. And to choose a lender with the best offer, use the services of the Payday Depot platform, which will select the best loan conditions for you.

The best protection against deflation is the same as against inflation ― risk diversification. If your investments are distributed among different assets, inflationary and deflationary fluctuations will not cause serious damage, because the decline in profits in one of the sectors will always be offset by growth in the other.

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