How to Prepare for Deflation

@Swiss Genome : Yes, "bi-inflation" is being caused by the current market manipulation going on but I disagree with any thoughts of seeing inflation or hyper-inflation in the US due to "money printing" (at least not at these levels or for many many years.). The inflation we see right now in June/July is "cost push" caused inflation, by trying to get the price of oil/gas to rise, even though it wants to fall, such that ALL goods remain more expensive due to the increased cost of transporting goods.

But the market is in a deflationary cycle and has been for about a year (prices of oil and gas want to fall badly ... and have been at their lowest prices in many years). Our chief economists are doing their best to keep inflation going (interest rates low, manipulation, housing credits) and now at the tipping point of the losing battle it is bi-inflationary in look and feel to us on main street. This is indeed a sign that this phase will be over soon because it means, no matter in the face of inflation, deflation is what is winning out. Economic momentum is strong in that direction.

Exhausted Fed/Bernake will finally realize that even though they "can always create inflation", unfortunately, all inflation isn't equal in all situations. Sometimes it is just artificial and not enough. The fed will loosen its grip on the tiller and the true wind will steers us. Delation will take hold and not hyper-inflation. (A smart economist would allow that force to take hold and then use its momentum to shape things back toward an inflationary cycle. Use the gravity of the moon to pull a 180, like a good sci-fi movie.).

All market forces are currently geared towards "re-capitalization". This means what? Saving. If banks, business, and people are saving that means they are not spending. Large sums of money, sitting around, not being spent means that the "velocity of money" will be very low. The money supply, no matter how big, will not be doing any work. The economy will be icy even though there has been all this "liquid cash" injected into it. Who has the cash to spend? Not you and I so prices will weaken. (If I see the fed print so much money that they are handing it out to me and you, ok you win, hyper-inflation coming, and then I guess I'll be forced to buy gold/silver. But I'm pretty sure we won't see a dime.)

If the common person on main street is not going to see any of the money that was pumped into the economy by bailouts/stimulus in their hands then my belief of deflation will very likely hold true. Purchasing power will remain very low for the average debt laden consumer but the value of any real dollars they hold will continue to grow to compensate and try to encourage economic activity of some sort. I believe the dollar will become very strong and prices and wages will fall. Interest rates may even go negative.

My 2 cents (soon to have the purchasing power of 3).

FoolMeOnce of CA 6:18PM July 26, 2010