Categorized | Domaining Tips

How Would Prosperity, Deflation and Inflation Affect Domain Values?

Posted on 22 October 2013 by Andrei

In my opinion, there are three important possibilities when it comes to the worldwide economy. We might have economic prosperity (positive scenario), deflation (negative scenario) or inflation (negative scenario).

Today, I’ll try to analyze all three scenarios and explain what I think will happen to domains as well as other asset classes.

1) Economic Prosperity

If we will have economic prosperity (in other words, if the crisis will come to an end), then pretty much all asset classes aside from precious metals will probably do remarkably well.

Stocks, real estate and last but not least, domains.

So under such circumstances, it would be a shame to keep your wealth in cash or bonds because you’d be missing out on all the fun and not to mention earnings.

Precious metals, in my opinion, would not do well at all because people would sell their gold/silver in order to invest in assets which can generate returns (dividends, rent and other types of revenue) and have more upside.

Recap: domains, stocks and real estate would do well; precious metals, cash and bonds, not so much.

2) Deflation

Deflation is the opposite of inflation, in other words, during deflation cash is scarce and therefore, cash is king.

Businesses would go bankrupt, wages would fall, unemployment would rise and so on. In other words, a lot of wealth would disappear.

Therefore, most assets would perform poorly and gradually become cheaper.

Stocks would plummet, real estate as well and unfortunately, domains wouldn’t be an exception.

Cash is king, so those who managed to hang on to cash would do well.

Solid bonds (I’m talking about bonds issued by countries who would actually be able to pay creditors back, so only strong countries like the United States) would do well, while speculative bonds (countries which aren’t all that strong financially) wouldn’t.

I think precious metals would also do well. I know most people perceive precious metals as a hedge against inflation but the previous crisis has proven that they are also a hedge against uncertainty and would therefore probably perform well under a deflation scenario as well.

Recap: cash would be king, strong bonds would do well, precious metals would probably do ok as well; domains, stocks, real estate, speculative bonds and most assets would perform poorly.

3) Inflation

When it comes, to deflation, you lose wealth directly by losing your job if you’re an employee, through bankruptcy if you’re a business owner and so on.

With inflation, on the other hand, you lose wealth as a result of the fact that the currency you get paid in is worth less and less. In other words, you lose purchasing power.

Let me make one thing clear: you don’t have to worry about hyperinflation if you live in a country with a powerful economy such as the United States. There is no historic precedent for that, no historic example of a very powerful economy brought to its knees *by* hyperinflation. Now before you tell me about Germany/The Weimar Republic, please understand that their economy was already weak when hyperinflation appeared. In other words, hyperinflation appeared *after* the economy was already weak due to other factors, it’s not hyperinflation that brought it to its knees which brings me right back to my statement: there’s no historic precedent of a powerful economy brought to its knees by hyperinflation.

But still, that doesn’t mean inflation (so without the “hyper” prefix) can’t be a real threat. You don’t need hyperinflation to lose purchasing power, all it takes is some consistent let’s say 5-6%+ annual inflation.

In my opinion, stagflation (which is inflation + weak economic growth, a term Milton Friedman coined) is the most plausible scenario.

If there will be inflation/stagflation, cash will lose its purchasing power and assets will rise.

Stocks will rise, real estate will rise, precious metals will rise, domains will rise.

Desirable assets in general will go up in value.

Cash would be a poor choice for those who want to preserve wealth and as for bonds, it depends on how much the country in question is willing to offer and on what the central banking landscape will look like.

Recap: holding on to cash wouldn’t be a good idea and desirable assets (stocks, real estate, precious metals and of course domains) would go up in value.

Conclusions

In two out of three cases (economic prosperity, inflation), domains will do well. In the third case (deflation), they wouldn’t.

In the future, I might analyze each scenario in detail and help you figure out how to calibrate your strategy. How to decide which domains you should invest in, how much of your wealth to invest in domains and so on.

For now, I hope you found this introduction useful.

I know most of you aren’t economists but at least understanding a few key terms such as inflation, deflation, stagflation and so on is in your best interest.

By understanding how the economy works, you will be able to interpret the events you hear about as they unfold, position yourself accordingly and make informed decisions.

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