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Deflation - Defined

Guest post by: Catherine Avery

Article Overview: While we believe we are in a recovery phase, it has certainly not met the expectations of most individuals. I recall an interview of Nouriel Roubini who was asked if we were going to have a double dip. His reply was no, but we will have such slow growth that it will feel like we are in a recession. In addition, many news stories have been carrying the headline of 'deflation.' Deflation is actually an uncommon climate here in the U.S., but anything is possible. To learn more about deflation and how it affects your investments, please read on.

Deflation - Defined

Deflation is a term we typically do not hear much about. Most of us are familiar with inflation, which happens when too much money chases too few goods. "In economics, deflation is a decrease in the general price level of goods and services," states Wikipedia. Typically this is because there's no demand in place. In other words, deflation is defined by periods of low-level growth generally associated with recessions. While the consumer has slowed down here in the U.S., they are still spending on necessary items like medical and educational. On the other hand, many have debated whether or not the housing market is experiencing deflation. But let's take a look at the phenomenon. Deflation in US history Deflationary periods are not common. In fact since the Republic was first created there have only been three significant periods of deflation in the United States: · The recession of the late 1830s following the Panic of 1837 · The Great Deflation after the Civil War · The deflation of 1930-1933, part of the United States' slide into the Great Depression According to Wikipedia the deflation of 1836 and the Great Depression occurred because there was an enormous contract of credit (money), bankruptcies creating an environment where cash was in frantic demand with the Federal Reserve not adequately accommodating that demand so that the banks toppled one by one. Deflation Worldwide Deflation is a global phenomenon. Japan went through it's own deflationary period in the 1990s and returned to it again in late 2009. What separates the US from Japan are a couple of crucial points. Japan is dealing with a different cycle in its aging population than the US, they are also a culture of savers which means there is not a lot of consumption going on. What to do in a Deflationary period Investors would be struggling to find safe, dependable sources of income, according to Brett Arends, in his article: "What Deflation Means for Your Money." Which means, in turn, that top-quality bonds, which provide that income, would flourish. Cash would still be prince, though (income is king in deflationary times.) Arends writes; "If a savings account earns you zero percent interest, but prices fall 2%, you've still made 2% in real terms. And it's tax-free. Most analysts will also tell you that deflation is typically terrible for the stock market. But not all stocks need suffer. Take the findings of James Montier, a former strategist at SG Securities in London, who looked at what investment strategies actually worked in Tokyo after 1990. Montier found that most of the stock market's slump came from the sinking of the overpriced "glamor" stocks. Meanwhile many under priced, good quality, so-called "value" stocks actually fared much better. Montier concluded that a Japanese investor who had invested in the value stocks, and shorted, or bet against, the glamor stocks could have made good money even in the midst of deflation and a terrible bear market. CAIM Recommends The fact is that no one can predict what the future holds with any certainty. We strongly recommend a diversified portfolio of high quality, dividend-paying stocks and bonds with an asset allocation customized to meet your goals. Copyright 2010, CAIM LLC

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Article Tags: climate, double dip, investments, news stories, recession, recovery phase, roubini
Referred by: http://elliacommunications.com



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