Inflation or deflation?

I am firmly in the deflation camp. I worry about inflation over the short-term, but I still think the long-term threat to the global economy is deflation because asset price deflation will usher in deflationary forces. Nevertheless, there are valid arguments to both sides of the debate and a great article in the Vancouver Sun today highlights this fact. I will post a portion of it, but I suggest you go to their website and read it in full. The full article has some thoughts on investment strategies that might work in both an inflationary and a deflationary environment.

Keith Woolhouse, Canwest News Service

Published: Monday, June 30, 2008

For most investors, there has probably never been a period like the current one in which strategists and economists are so markedly split into two camps.

Merrill Lynch calls it the Great Divide in which investors must base their strategy on the emergence of either inflation or disinflation.

Inflationary pressures have sufficiently alarmed the central banks of Canada and the United States to put the brakes on their interest rates.

The disinflation theorists believe that a slowing in the rate of inflation is more likely.

Britain, meanwhile, is concerned about stagflation, a mix of both, in which high inflation is accompanied by falling economic growth.

“Right now, investors seem to have abandoned the middle ground of the Great Divide. Not surprisingly, that’s where we think attractive opportunities lie,” says the Merrill Lynch research investment committee, made up of the firm’s global analysts and strategists.

The difficulty is how to structure a portfolio to minimize risks and maximize returns.

The Vancouver Sun, 30 Jun 208

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