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Think of Markets as Balloons

How to understand inflation

02 June 2020
ecently, central banks all over the world recklessly printed money. The US probably printed USD6 trillion new dollars.

Inflation is inevitable. We need to take the steps to protect our wealth. But, at the same time, there might be opportunities to profit.

Supply and Demand

The price for something increases if either its demand increases or its supply decreases. The price 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: Balance supply and price to 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)

Look at it in another way: When demand is high, people spend more to buy or invest in it. Higher demand equals more money spent or invested in an item.

As people spend more on an item, the suppliers of the item would then either either increase its supply or its price, or both. The would continue doing this so long as their net revenue increases.

Rethink all this in terms of balloons

Think of the item as a "market". Think of the money spent or invested as money "injected" into the market. Then, imagine the market as a balloon.

The size of the balloon represents the money injected into the balloon. Money expands the balloons and this is inflation. When money is removed, the balloon deflates and that is deflation.

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

Only governments and their central banks can destroy the money they print. For people like us, we can only flow or love the money from one place to another. When we flow money out of one balloon, we pump it into another one. This is like investors moving their money from balloons that is not inflating much to ones that inflate faster and bigger.

What if money is created?

Thin air is the substance fiat money is made of. There is plenty of it but never enough. But the more money is printed, the more there is to inflate balloons.

The balloons start out as different sizes, but each can inflate as investors move their money between them. Knowing the plans of central banks and which balloons are in demand by investors, we can make profitable investment decisions. More below.

What's bad about deflation?

When balloons deflate, the amount of money in the market reduces and price of the item in the market falls. The investors suffer a loss.

It's worse if the investors took a loan to make the investment. For example, if the investor had bought a house and its value goes down, the investor would not be able to sell the house to settle the mortgage, and would still have to pay the monthly mortgage payments.

Somehow, widespread deflation in markets is scary to many governments. Hence their panic at coronavirus induced economic slowdown and why they are printing so much money.

So will widespread 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 it deflates:

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

The more money is printed, the more the gold balloon will inflate. In the end money flows always flows into gold, but it can take a long time.

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.

3. Invest where investors are pumping their money. But be careful to take your money out after the prices have peaked. Don't get caught when the prices fall.

4. Invest in companies that are robust to deflation. These companies would be ones to have a competitive advantage or a network effect in their favour.


I am not a qualified financial or investment advisor. Any investment decision you make are your own.


I am the founder of Mansa , the best platform where you can trade, keep and send gold.



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