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Planning For Inflation Or Deflation?

Friday, September 10, 2010 - 9:55 PM
This WSJ article reviewed the different investment options for both inflation and deflation environments. It makes the point that there is quite a bit of uncertainty about which might be a problem:
In 1979, as U.S. inflation was peaking, most experts predicted that it would stay high for years to come. Ten years later in Japan, the consensus was that stocks and real estate would continue to boom; no one foresaw that the nation was about to sink into a two-decade morass.

Did you avoid long-term CDs or long-term bonds around 1980? Long-term CDs in the early 80's proved to be a good deal.
Ken TuminKen Tumin5,472 posts since
Nov 29, 2009
Rep Points: 125,708
1. Saturday, September 11, 2010 - 6:30 AM
(I edited the quote below and added bold)

There are a few things about some of the author's common conceptions that I find confusing.  The assumptions.  That everything will just be okay.  Though suggesting we have very real, dangerous problems facing our nation is seen as alarmist, that accusation (that it is an alarmist/extreme view) is often cast by those who are not good at math.  If people are losing their jobs, houses sink further under water, or politicians continue to be politicians -- rather than genuinely solve real problems -- while the social security system is being tossed around as something to be dismissed or obliterated...   how can the author have the relaxed perspective that he does regarding deflation?

I don't understand the perspective that this is "just another cycle," and all will be well time.
An Imminent Threat Your more imminent threat is deflation, which may jeopardize your job security, can hurt the value of your stocks and will raise the real value of paying off your mortgage, even as it depresses how much your home is worth.

But if you are a retiree living on Social Security and pension income, the last thing you should worry about is deflation. Falling prices would be good for you. With each passing month of falling prices, your income would go further. (The government adjusts Social Security payments up to compensate for inflation, but doesn't cut them when prices fall.)

Thus what you should worry about is a rise in the cost of living—since your income is fixed and your potential earnings as an employee, if you did try to return to the work force, are fairly limited.

If deflation is the bigger danger for you, consider Japan. Its stock market peaked at year-end 1989. If you had then been gifted with perfect foresight, what should you have done? Since then, stocks have lost an annual average of 6%, net of changes in the cost of living, according to data from Elroy Dimson, Paul Marsh and Mike Staunton of London Business School. Long-term bonds, meanwhile, gained 5.3% annually—and would likely do well here, too, if deflation lingers. Only at low levels of deflation would stocks do moderately well.

TIPS Your best bet remains Treasury inflation-protected securities, or TIPS, whose principal value goes up as the cost of living rises.

MikeMike327 posts since
Feb 22, 2010
Rep Points: 876