Saved from inflation Mr. bond?
But what if the medicine kills you?Deflation- is it possible?Once again we look at the probability of deflation. While the concern was inflationary pressure. We need to be aware that deflation could pose a larger problem short term and create an environment that would not have a sustained recovery for a significant amount of time. Deflation-decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. Opposite of inflation. When prices of some things fall, consumers get a break. Don’t think it’s all good news. When prices overall drop across all commodities and product. This becomes a destructive cycle of deflationary pressure. Profits drop fast; companies are forced to cut jobs and pay, spending falls even quicker, and stagnation sets in. Some economists fear that if inflation is a potential crevasse, deflation is a black hole. What to do? Deflation is the opposite of inflation. With that we can look at the benefits to inflation (which is debt absorption) and counter that you as a consumer do not want substantial debt. In addition to minimizing your payables- don’t be afraid to invest in areas that will counter inflation without the potential drop in corporate profits. Bonds? Again?- Yes while the poor unfortunate bond has been dealt a foul hand in the reputation department, they have a fundamental benefit in a deflationary environment. (Especially one where cash is not paying you anything.) They hold value and pay while all else is dropping. You might ask- What if you’re wrong on the deflation inflation debate. Proper bond management is fundamental in taking the risk out of bond investing. Should you be buying 30 year notes right now? In general terms maybe not. A solid laddering strategy would help deflect the risk and place you in good position regarding any direction the market may take.
What saves? Well besides the obvious- Optimism of a recovery and some loose fiscal policy are just what the doctor ordered. The question how fast on the draw is Mr. Ben?