Tuesday, July 08, 2008

Inflation and Deflation

It seems very likely that at least one of the big global corporations is not going to survive another 12 months. GM, Ford, Chrysler, some major bank etc is likely to blow up. If it happens when the inflation scare is still on, then thats the day when bond yields will go through the roof. Thats the day to buy bonds.

Inflation and deflation are two sides of the same coin. Credit contraction today is leading to asset deflation. In another 12-24 months, assuming commodity prices stabilize, this asset deflation might result in CPI deflation. My guess is this is what happened in Japan, with its asset bubble and crash of the 1980s, followed by liquidity trap and deflation. One needs to look at bonds if there is a possibility of deflation out there.

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