Deflation: The Actual Causes and How to Invest Effectively During an Economic Slowdown

The economic slowdown problem that is currently dominating the global market is not just a temporary economic factor, but a phenomenon that can directly affect household resource management and investors’ investment planning. This article will help you understand more deeply where deflation comes from and how to adapt and respond to this situation.

Deflation is the silent enemy that diminishes the reality of prices

Deflation ( is not a phenomenon that many people understand clearly. Although it is a deeper problem than inflation, the nature of deflation is when the price levels of goods, services, and assets decline over an extended period within the overall economic system.

The important truth is that when deflation occurs, the value of cash increases, making each dollar you hold more purchasing power than before. However, this does not necessarily mean good news in all aspects because falling prices indicate a slowdown in overall economic activity.

Causes of deflation: Re-examining for deeper understanding

Deflation does not happen by chance; it results from several interconnected factors.

) Demand-side issues: Consumers hold back on spending

When people start to worry about the economic future, they tend to cut back significantly on spending. Increased debt burdens, unemployment, and reduced net income serve as warning signals for consumers to save more as a precaution. As a result, businesses find that demand for goods and services shrinks noticeably.

Supply-side issues: Technology reduces costs

Sometimes, technological advances and increased productivity ###Productivity( can lower production costs. Producers then reduce prices to stay competitive. An important data point is that in April 2020, Thailand’s Consumer Price Index )CPI( decreased by as much as -2.99% year-over-year, marking the most severe contraction in 10 years and 9 months.

) Financial issues: Unsuitable government policies

Governments may make mistakes in monetary and fiscal policies, such as raising interest rates too high, imposing excessive taxes, or printing insufficient money to meet economic needs. When money circulation in the system is inadequate, interest rates tend to rise, leading to reduced borrowing for investment.

Capital outflows: Compounding problems

Long-term capital outflows, both legal and illegal, reduce the amount of money within the country, resulting in higher interest rates and further linking the economy to other issues.

Real-world examples: Deflation in history

The Great Depression: Lessons that are still remembered

The United States from 1929-1932 experienced the most severe economic downturn, with the stock market crashing heavily on September 4, 1929, known as “Black Tuesday.” The impacts spread worldwide:

• GDP fell by over 15%
• International trade volume dropped by more than 50%
• Unemployment in the US soared to 23%, and some countries up to 33%
• Agricultural prices fell by more than 60%
• The effects lasted until the early years of World War II

Thailand’s situation: Not yet fully in the danger zone

Although Thailand experienced deflation in March 2020 for three consecutive months, it has not yet fully entered a deflationary state as defined. The 5-year inflation forecast remains at 1.8%, within the target range of 1-3%, and Bank of Thailand’s estimates show that the prices of goods and services are expected to rise from -1.7% in 2020 to 0.9% in 2021.

However, if the global and Thai economies contract more or recover too slowly, the risk of entering deflation still exists.

Who is most affected by deflation?

Beneficiaries of deflation

1. Fixed-income earners - Their purchasing power automatically increases as money becomes more valuable.
2. Lenders - The debt repayment amount remains the same in real terms, but what borrowers can save decreases.
3. Cash holders - Holding cash becomes an automatic investment.

Those who lose out from deflation

1. Businesses - Profits decrease as prices are lowered; debtors face higher real debt burdens.
2. Shareholders - Stock values decline.
3. Financial institutions - Income from lending decreases.

What to invest in during deflation: Think long-term

Bonds: A stable foundation

During deflation, the Bank of Thailand often lowers interest rates, which increases the value of existing bonds. Investors should choose highly credible bonds, such as government bonds, because they offer stable returns and lower risk.

Equities: Quality stocks as an option

Although the stock market may decline during deflation, stocks from companies with strong performance and essential daily business—such as food and beverages, consumer goods—can still yield returns. Careful selection can lead to stock prices reflecting the true value of companies once the market normalizes.

Real estate: Opportunities for the cash-rich

In deflationary periods, property owners often need to sell quickly at lower prices, creating opportunities for cash-rich investors to buy at favorable prices. However, investing in real estate requires consideration of location and ongoing cash flow over the long term.

Gold: Good diversification

Gold prices tend to rise during deflation because of its intrinsic value. Investors can buy gold at lower prices for speculation and as a good risk diversification tool.

CFD Trading: Profit from both directions

Beyond buying stocks, investors can consider short-selling stocks or using Put Derivatives (Put DW) as hedges against downturns. CFD trading allows investors to profit from both rising and falling markets without owning the underlying assets.

Preparing for deflation: Smart planning

1. Hold some cash - Keeping some cash on hand during this period is a wise preparation.
2. Study and analyze - Before investing, research the fundamentals of companies, assets, and markets.
3. Manage risks - Use techniques like dollar-cost averaging, profit-taking, and stop-loss orders.
4. Invest in essential businesses - Choose to invest in companies with products, services, or solutions that people still need, even during economic downturns.

Summary: Don’t let deflation dictate your decisions

Deflation is certainly a challenging phenomenon, but it is not the end. When salaried individuals understand the true causes of deflation, they will know how to invest wisely. Regardless of the technique chosen, the key principles are deep research, risk calculation, and maintaining long-term holdings. Ultimately, those who never give up—and sometimes economic downturns can be opportunities—can lay the groundwork for new growth and recovery.