Navigating Recession Turmoil
Recently, many have inquired about whether inflation or deflation follows historical periods of economic recession or social and economic turmoil. I believe the true meaning of this question is, if faced with recession and turmoil, is there a defensive paradigm that can systematically preserve oneself, including wealth and status? People always seem to be in a trance about what they love and what they have, as if it is truly enduring, yet also like a dream and an illusion, like the love of Aranjuez, lost before it is even embraced.
The rise and fall of society and the prosperity and decline of the economy all follow cyclical patterns, but the definition of these cycles is extremely vague, lacking clear measures of intensity and alternating time. That is to say, how good is the economy, and for how long? How bad, and to what extent? It's unclear. This poses a great challenge for defensive strategies against cycles. In most cases, people are at a loss.
Firstly, whether it is inflation or deflation after economic turmoil depends on whether the counter-crisis measures are fiscal or monetary.
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Crudely speaking, fiscal policy leads to deflation, while monetary policy leads to inflation. Taking the Great Depression in the United States in 1929 and Japan's Great Recession in 1991 as examples, what followed were continuous deflations. The textbook depiction of the U.S. Great Depression is milk being poured into ditches and rivers, while Japan experienced almost unchanged prices during the "lost three decades." Deflation means cash is king, and inventory, production, and sales all face the challenge of a constantly shrinking demand. Governments continuously incur debt, with fiscal deficits persisting, using public spending to make up for the lack of private investment. Thus, today's Japanese government is the most fiscally burdened developed country.
When government borrowing becomes unsustainable, developed countries will turn to monetary stimulus, which people colloquially describe as "money becoming worthless." The vast majority of poor countries, facing economic turmoil, directly allow the rampant issuance of currency, because poor countries usually do not have a reliable tax system. From Latin America to Africa, there are countless countries eager to issue currency. If deflation is less harmful to the wealthy who hold a lot of cash, then continuous hyperinflation is the continuous plundering of the government on all citizens. As long as the economic turmoil lasts long enough, almost all economies, including historical China, will eventually take the path of currency issuance + inflation, eventually becoming so poor that they only have money left.
Since the subprime crisis, the predicament of developed countries has been that they were unable to escape the original fiscal predicament and have embarked on a rapid path of currency issuance characterized by quantitative easing. The outcome is still unknown, but for now, it has had the effect of driving up financial asset prices. Considering that Japan is the originator of continuous fiscal stimulus and quantitative easing, people are waiting to see how Japan will respond.
In summary, facing a great recession, poor countries directly issue currency, leading to direct hyperinflation; rich countries will turn to currency issuance when fiscal means are exhausted, experiencing deflation first and then inflation. Therefore, not being able to escape a recession almost means a major reshuffling of social wealth.
Secondly, when economic recession and hyperinflation are intertwined, what is directly under pressure is not the defensive strategy, but whether the legal system is robust.
If government fiscal and monetary policies eventually become very lax, inflation will come sooner or later, with the only question being whether there is a period of deflation before inflation is reduced. So how do people respond? They may typically turn to holding resource-based assets with low holding costs, such as land, forests, or minerals. Many Hong Kong people became wealthy by hoarding land during Hong Kong's economic downturn and the early stages of the mainland's real estate market. During the great changes in the former Soviet Union and Eastern Europe, many oligarchs emerged who became rich by seizing resource-based assets. During a period of continuous hyperinflation, trying to accumulate resource-based assets is very dangerous. Because its success or failure depends on whether the country can maintain a stable legal framework. If inflation follows the failure of fiscal and financial functions, and oligarchs seize resources after inflation, what follows is likely to be the collapse of the legal system and the law of the jungle. When the government faces recession and inflation, the damage to the legal system may be gradual, that is, the proportion of confiscated income in fiscal revenue continues to rise, eventually reaching a systemic inflection point. The historical lesson is that poor countries are more likely to deviate from and abandon the legal system than developed countries, which should be self-evident. Even developed countries often go through a period of conservatism or even a far-right atmosphere. In other words, if you want to build a systematic defense strategy to protect your life and property, you should not only look at inflation but also at the legal system.
So far, many people have turned their attention to gold. I have indeed seen families with a bad background who have been raided many times, and in the most difficult times, they can still magically take out gold rings and the like, bargaining with itinerant goldsmiths to get some money to get through the most difficult times. But now it is very different from the past. In the past, cash or gold was owned anonymously. Nowadays, the purchase of gold jewelry or physical gold requires strong real-name verification, and it is almost impossible to travel across borders with gold. Therefore, using gold as a haven for wealth is necessary, but the strategic capacity has become quite difficult.
Thirdly, a feasible systematic defense strategy is just a framework, easy to understand but difficult to implement, challenging human nature.
The "Tibetan Book of Living and Dying" says that death does not come suddenly. For those who are unwilling to accept the inevitability of life and death, death is a loss, losing bit by bit of time and status. So what is the perfect strategy to maintain one's wealth permanently? To build a systematic defense strategy, it is nothing more than cross-border, cross-cycle, and time-neutral.
Faced with the law of cycles, some people will naturally think of cross-border asset allocation, that is, a balanced allocation of domestic and foreign currency assets, domestic and overseas assets. These are feasible and necessary. But pay attention to the details. First, the neutral strategy for cross-border is that domestic assets and non-domestic assets should each be 50%. In this way, the exchange rate is neutral for you. Second, the可选 defense assets may be limited to economies with reliable legal systems, not developing countries that are popular for a while. Third, if too many assets are overseas and the main life and work radius of a person is within the territory, how long can the continuous separation of assets and residence be maintained? It is also worrying.
Faced with the law of cycles, some people also think of cross-period asset allocation, the most typical long-term assets, naturally, are real estate in world-class cities. Reason tells us that because we do not know how deep and how long the recession will last, what you can do is essentially "through the cycle," that is, to make asset allocation with a duration of 30 years or even 50 years, similar to real estate in New York, London, Paris, and the like. The core areas of world cities and the functions of the core areas often change very slowly, which is the logic of pursuing core real estate. Whether this logic is established or not also depends on the local real estate holding policy, especially tax policy. In recent years, the supply of residential properties in the core areas of China's first-tier cities of Beijing and Shanghai has been less than 100,000, which may be investable in terms of 30-50 years compared to a population of nearly 8 million households, but tax and land policies, as well as building life, still need to be considered. In addition, savings-type life insurance is also often popular during economic recessions.
Faced with the law of cycles, an eager-for-quick-success person is almost impossible to make investments of more than 30 years, because this has exceeded the length of almost all of his investment career after he has formed the ability to invest. In other words, he is likely to see the success or failure of his investment in this life, and it needs to be accepted by future generations. I am very skeptical about whether successful wealthy people are willing to make such a long-term investment because it is difficult to overcome conceit and short-sightedness. Few entrepreneurs will thank the legal system and the market for their success, and they will have the illusion that their talent, effort, and luck are the true meanings. If a few people are willing to try to go through the cycle, then a broad-based index like the Dow Jones, which reflects the future of the global economy, maybe the best choice. Without the enlightenment and recognition of the legal system and the market, people is almost impossible to understand that contemporary civilization is not something that can be taken for granted, but may be an accident that can be lost at any time.
Is it inflation or deflation after economic turmoil? There is no good solution to this problem. The secret to living is to be "stupid" enough and to understand this "stupidity". Some people come to this world, not to reproduce, but to see how flowers bloom, how water flows, and how the sun rises and sets. Living in the world is nothing more than understanding some truths and meeting some interesting people and things. Life is nothing more than an accident, and there is no cause and effect. The world is not worse because I have lived, and there is no regret in coming to this world.