Wednesday, September 23, 2009

Deflation?

By George Washington of Washington’s Blog.

As Absolute Return Partners wrote in its July newsletter:
The most important investment decision you will have to make this year and possibly for years to come is whether to structure your portfolio for deflation or inflation.

So which is it, inflation or deflation?

This is obviously a hot topic of debate, and experts weigh in on both sides. I’ve analyzed this issue in numerous posts, but every day there are new arguments one way or the other from some very smart people.
Because the arguments for inflation are so obvious and widely-discussed (bailouts, quantitative easing, Fed purchasing treasuries, etc.), I will not discuss them here (other than pointing to an interesting new argument for inflation by Andy Xie).

How Bad Could It Get?
The biggest deflation bears are rather pessimistic:
David Rosenberg says that deflationary periods can last years before inflation kicks in
Renowned economist Dr. Lacy Hunt says that we may have 15-20 years of deflation
PhD economist Steve Keen says that – unless we reduce our debt – we could have a “never-ending depression”
These are the most pessimistic views I have run across. Most deflationists think that a deflationary period would last for a shorter period of time.

continue reading article with links to and synopsis of other possible scenarios, and comments that follow...

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