Deflation means the value of stuff goes down (deflates) and the value of money goes up. Especially when people are fearful, they want to hang on to their money. Because money is dear, the demand for the stuff money buys goes down. When the demand for stuff goes down, the prices drift down. In other words, with deflation you can buy more stuff for the same amount of money. For example, the Deseret News recently published a price comparison of various consumer goods. The cost of a grocery cart of 15 items was $119.74 this time last year and only $116.08 this year. Money was worth more at the grocery store this year.
Inflation means the value of stuff goes up (inflates) and the value of money goes down. In other words, money buys less and less stuff. The same grocery cart of 15 items might cost $125.00 after a year of inflation. For most of us, inflation is what we know. When I was a child, a candy bar was a nickel. When I was a teenager, a Taco Bell burrito was 19 cents. Our first home was only $36,000, and we sold it a year later for $39,000.
During times of deflation, cash is your friend and debt is your enemy. You don’t want to owe money in times of deflation, because it costs more and more to repay a loan. During times of inflation, cash is better spent or invested in stuff and debts are generally easier and easier to pay down.
These definitions suggest you would want to own money (currency, treasury bonds, and government-insured bank CDs) during times of deflation, and own stuff during times of inflation. “Stuff” is things that are not measured in dollars, like real estate (acres or square feet), precious metals (ounces or bars), wheat (bushels), fuel (gallons, barrels, or BTUs), or stock (shares in a company).
Fear, uncertainty, and doubt complicate this simple picture. Stocks in general do poorly when FUD is high, no matter the inflation rate. When FUD is high precious metals may behave more like currencies, going up when logic suggests they should go down.
In summary, during times of deflation you want to own money and be free of debt, especially high-interest debt. During times of low-to-moderate inflation, you want to own stuff. If FUD is low, you could include stocks in your list of stuff. If FUD is high, you almost always don’t want stocks. During times of hyper-inflation, when FUD is bound to be high, you want to own stuff that people really need, like food, fuel, water and dry goods. Pete