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Think of Markets as Balloons

Here is an easy way to understand inflation and deflation so that you can protect your wealth and make a profit

02 June 2020
ecently, central banks all over the world have been recklessly printing money. The US may have printed USD6 trillion new dollars by now. There are fears of deflation and inflation.

These fears are not unfounded. Let me explain so that you may take the steps to protect your wealth. You may even find the opportunity to profit.

First, the Law of Supply and Demand

Supply and demand has opposite effects on prices. The price for something increases if either its demand

increases or its supply decreases. The opposite is true too: The price of a product falls if either its supply increases or its demand decreases.

A crafty supplier would aim to find the sweet spot between supply and demand for his product: Supply only so much at the highest price possible. This way he would earn the highest revenue possible.

Wheat farmers are said to sell only a portion of what they can produce and burn the rest to get the best prices. OPEC countries routinely raises and reduces their respective oil productions to get the highest price possible.

Demand = Money Spent (or Invested)

Demand is the variable that determines how much money is spent or invested in a product.

When demand is high, people spend more money on the product by buying or investing in it. Higher demand equals more money spent or invested.

As people spend more on a product, the suppliers would increase their revenue by either increasing the price or the supply, or both. The would keep doing this so long as they see their net revenue increases.

Note that "Spending" and "investing" have the same impact on prices. You spend on items you don't intend to resell for a profit. You invest in items you intend to resell for a profit. In either case, you are buying a product and spending money.

Rethink all this in terms of balloons

Yes, imagine markets as balloons.

The size of the balloon represents supply, i.e. the size when it is still uninflated. A large-sized balloon would require more air to inflate it. It takes less air to inflate a small balloon.

Whenever supply increases, imagine that the balloon has become bigger. Whenever supply decreases, imagine that the balloon has become smaller.

The air that inflates the balloons represents money, which is also demand. Money fills the balloons and causes inflation. When you remove the money, the balloon flattens and that is deflation. It takes more money to inflate a large balloon.

How inflated or deflated the balloon is represents prices, A well inflated balloon is a market with high prices. A flat (or deflated) balloon is a market with low prices.

The housing market is a balloon. When more people buy houses, the balloon inflates i.e. the prices go up. The developers build more houses. Suddenly there's a glut. The balloon size is now bigger. But the money inside has not grown. The balloon flattens. The price falls. Developers then stop building new homes. People start buying again. Demand builds again. The cycle repeats.

The stock market is another balloon. The more people invest in stocks, the more inflated the balloon becomes. But when investors take their money out, the more deflated the balloon becomes.

Money, like air, flows.

The difference between money and air is that when money flows out of one balloon, it is usually pumped into another one.

This is because investors seek the best places to put their money. So they move their money into balloons that they believe would give them the best return. That means balloons they believe will inflate fastest and most.

What if money is created?

Thin air is the substance fiat money is made of. There is plenty of it, because money is being created by central banks everywhere.

Let me say that printing money is wrong. It makes a small group of people richer while making the masses poorer by reducing their purchasing power. Prices go up and products become unreachable to those not savvy enough to invest in the right balloons. Many don't even realise that it is a manipulation of the money supply that causes the inflation. They are told that inflation is natural.

But anyway, The more money is printed, the more there is to inflate balloons. But not all balloons are filled at the same rate. Firstly, central banks may pump the newly printed money into specifically targeted balloons. And then, balloons are all of different sizes, the sizes of some balloons can change and investors move their money between balloons.

Knowing the plans of central banks, and which balloons are fixed in size and in demand by investors will allow you to make profitable long-term investment decisions. More below.

What's bad about deflation?

We've mentioned why inflation is bad: Because common folk lose their purchasing power. Money they had saved over the years won't buy them what it could have before they started saving.

Unlike inflation which is bad to the common folk, deflation is bad to the more sophisticated folk. These are the folks who has taken out loans and owe credit cards. When balloons deflate, their incomes and the price of the items they had bought or invested in goes down. But they continue to have to pay their debts at the previously fixed amount.

For example, if they had bought a house and its value goes down, they would not be able to sell the house to settle the mortgage. If they had invested in a business, and the prices of the products which the business sells fall, they may not recover their investment.

Many governments, including the US government, find deflation scary. These governments owe too much debt and they need investors to support them. Imagine if they have to repay their debt during a deflation. Hence their panic at the economic slowdown due to the coronavirus and why they are printing so much money right now.

So will deflation occur?

Printing money can artificially keep prices high. But inevitably the fundamentals will catch up.

They can stall deflation, but unless the fundamentals change, sooner or later all that printed money will flow to balloons that give investors the best returns. Maybe this is what they are hoping, i.e. that the coronavirus crisis ends quickly and the economy becomes as it was.

What will inflate?

Take the opportunity to invest where inflation will occur and get out before deflation occurs:

1. Think of gold as your default currency. Keep your long term savings as gold.

Gold is among the few balloons that don't change in size. But money flows in and out of the gold balloon, meaning that the gold price fluctuates.

In the long term, money printing will cause the gold balloon to inflate but you must be able to hold your investment for at least six months for the gain to become apparent.

2. Apart from gold, consider other precious metals. Experts are pointing out that the the gold to silver differential had been abnormally high. They expect the silver price to increase so that the differential is less. It is a little late right now, but the gold to silver price ratio is still high at 95 to 1; they expect the silver price to rise so that the Ration is 80 to 1.

You may use a similar method to decide the right ratio of platinum and palladium price to gold and judge whether the price of these metals will rise.

In case you are wondering, I have mostly bought gold and some silver and platinum.

3. Invest where your central bank is pumping newly printed money. But be careful and be ready to take your money out after the prices had gone up. Don't get caught when the prices start moving down.

4. Invest in companies that are robust to withstand deflation. These companies would have a competitive advantage or network effect in their favour. The balloon of these companies must inflate faster than gold or silver for the investment to make sense.

Seeing markets as balloons has helped me to understand the flow of money, the impact of money printing and about investing. It has helped me to become more strategic in investing by allowing me to apply the four corners.


I am not a qualified financial or investment advisor. Any investment decision you make and the associated risks must be your own.


My project Mansa is an online marketplace for trading of gold. It would benefit me if you were to trade gold on the Mansa platform. Mansa is currently still under development.



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