What Deflation Could Mean, and Why it Would be Good for Lenders

Fred Wilson recently wrote a post pondering implications of deflation if it persists further. He posits that cheaper energy amongst various other factors could lead to long-term/semi-permanent deflation.

He ultimately asked what he should be investing in if he is assuming deflation is here to stay.

It’s an interesting question.

(1) I am not going to argue whether or not deflation is here to stay — above my pay-grade and I’m not an economist.

(2) I will list some implications of deflation — especially deflation that isn’t just temporary

(3) I’ll explain why I think investing in lending companies will become even more attractive

Why should our economy worry about deflation?

A couple of main reasons.

(1) Deflation discourages consumers from spending. Why would you buy something now that you think will be cheaper in the future?

(2) Deflation discourages people from borrowing. Why would I borrow a dollar now if I think I’d have to pay back my debt with a “more expensive dollar” later?

a. Put differently, the dollar I’d be paying back would be worth more than the dollar I originally borrowed.

**Low interest rates could ease this fear for a time, and could continue to encourage borrowing — but that isn’t really sustainable.

Keep in mind that borrowing is good! As an example, the government is keeping interest rates low right now as a way of encouraging people to invest in equity markets, but also to encourage builders to borrow and spend on growth. More borrowing helps the economy!

And deflation causes a negative tailspin because if people expect prices to fall, they’ll wait to spend, causing prices to fall further, causing them to wait longer, and on and on and on.

Why is this good for lenders?

If you’re starting to catch on, you might say: “well, if life is getting harder for debtors, that must means things are getting better for creditors!”

If you just said that, then you and I, my friend, are in agreement.

Creditors will be lending money and will be getting paid back with dollars worth more than the ones they parted with months or years earlier.

We’ve invested in a couple of lending platforms in the last few quarters and are continuing to look at more.

These companies have found more efficient ways to originate loans, use better data to evaluate credit worthiness and are targeting under served markets.

It’s an exciting time — I’m not sure if this deflation thing is here to stay, but in case it is, it just makes the lending markets more exciting.