Deflation is Coming: Why Is This the Most Easily Overlooked Economic Risk?

When your salary remains unchanged but the prices of goods continue to fall, it may seem like a good thing. But this is precisely the most frightening aspect of deflation—it can slowly drag the entire economy into a vicious cycle.

Is Deflation Really “Profitable”?

Deflation simply means that the average prices of goods and services are continuously decreasing, which is the exact opposite of inflation. It sounds good at first—your money becomes more valuable, and your purchasing power increases.

But here’s the problem: falling prices are not due to increased productivity, but because nobody wants to buy anything.

It’s like a silent economic recession. When companies find their products aren’t selling, they will:

• Cut costs → lay off staff
• Lower wages → consumers have less money
• Further reduce prices → profits continue to decline

This ultimately creates a terrifying price spiral downward—you wait for prices to fall further, companies wait for you to buy, and no one dares to act.

How Does Deflation Form?

Supply-side causes:

• Rapid technological advances reduce costs significantly
• Overcapacity leads to unsold goods
• Increased efficiency without matching demand

Demand-side causes (more serious):

• Rising unemployment, sharply reduced incomes
• High household debt, savings become the priority
• Banks tighten lending, liquidity dries up
• Consumer psychology turns pessimistic, preferring to wait for lower prices

During the COVID-19 pandemic in 2020, many Southeast Asian countries experienced this situation. Energy prices plummeted, tourism halted, factories reduced production, and a series of economic indicators turned negative.

Who Gets “Trapped” by Deflation?

This is the most unfair part of deflation—there are winners and losers:

Winners:

• Salaried workers with fixed wages (purchasing power rises)
• Creditors (the money they lent becomes “more valuable”)
• People with cash reserves

Losers:

• Business owners (profits are squeezed)
• Stock investors (corporate earnings decline, stock prices plunge)
• People with debt (repayments become “more expensive”)
• Unemployed and workers (job opportunities decrease significantly)

Why Are Recession and Deflation Always Together?

When GDP declines for two consecutive quarters, it indicates a clear slowdown in economic activity. At this point:

1. Companies stop hiring or even lay off workers
2. Unemployment rises, overall income drops
3. Consumer demand collapses
4. Companies are forced to lower prices to survive
5. But consumers still prefer to save rather than spend
6. Liquidity tightens further, interest rates are forced higher
7. Borrowing costs increase, investment shrinks further
8. The economy enters a deeper recession

This is why the global economic outlook for 2023 is so pessimistic. Energy crises, geopolitical conflicts, soaring living costs, multiple risks stacking up, and global GDP growth is only projected at 2.7%—far below the pre-pandemic average of 3.0%.

What Can Governments Do?

Traditional tools of central banks and fiscal authorities:

1. Lower interest rates—encourage borrowing and spending
2. Increase money supply—inject liquidity into the system
3. Cut taxes—give consumers more disposable income
4. Increase spending—government directly invests to create jobs
5. Asset purchases—central banks buy bonds or assets to support prices

But all these measures have a prerequisite: the market still willing to cooperate. When confidence collapses completely, even giving money for free will only lead people to hoard it.

How to Invest During Deflation?

This is the key question. Poor economic conditions ≠ no profit opportunities; it just requires a change in mindset:

1. Bond Allocation

During deflation, central banks will rapidly cut interest rates, causing bond prices to rise. Entering the market now can yield considerable capital gains. Prioritize high-credit-rated government bonds and corporate bonds.

2. Defensive Stocks

Choose industries closely related to daily life with stable demand:

• Food and beverages
• Utilities
• Consumer staples

These companies can maintain revenue even during a recession, often with higher dividend yields.

3. Cash is King

In deflation, cash is the best asset. The lower the prices, the more your cash is worth. Accumulate cash in batches, preparing for future “bottom-fishing” opportunities.

4. Real Estate and Gold

During economic downturns, property prices often decline. If you have sufficient cash reserves, this is an opportunity to enter at lower prices. But choose the right locations and timing.

Gold has traditionally been an inflation hedge, but in a deflationary environment, gold often also declines. However, its safe-haven properties still exist, making it a good risk buffer in your investment portfolio.

5. Unique Opportunities in Crypto Assets

Unlike traditional assets, some crypto assets may perform independently in extreme economic conditions. Bitcoin as “digital gold” and certain stablecoins offering yields are worth considering for diversification. Platforms like Gate.io allow you to allocate such assets.

The Three Key Things to Do

First: Keep Cash Build an emergency reserve of 3-6 months’ expenses. Avoid going all-in on any single asset. During deflation, cash flow is more important than paper gains.

Second: Diversify Don’t bet everything on a single industry or asset class. A mix of bonds + defensive stocks + cash + gold + crypto assets can help you stay stable amid uncertainty.

Third: Review Regularly Economic conditions change rapidly. Regularly check if your portfolio still fits the current environment. Especially since deflation often involves drastic policy shifts.

Final Words

Deflation is not a distant theoretical topic—it is lurking at the edge of the global economy. The downward revisions in 2023 economic forecasts, weakening global manufacturing PMI, declining consumer confidence indices—all are signs.

For ordinary investors, the most important thing is not to predict whether it will happen, but to prepare in advance. Keep cash, diversify risks, stay flexible—these fundamental principles never go out of style in any economic environment.

Deflation shifts wealth from consumers to savers. The question is, are you ready to catch this transfer?