Inflation or deflation?

Argument No. 1: Inflation

Let me think now: inflation is going to be a huge problem in coming years. Did you see the incredible $1.4 trillion federal budget deficit last year, with the same, or higher, budget deficit this year? Did you see a similar budget deficit projection for next year?

Have you seen that the spend-happy Congress is now running a budget deficit of $160 million every 60 minutes? Have you seen projections of $1 trillion annual budget deficits for years to come?

Have you seen how the Federal Reserve has seemingly lost its collective mind, with a near tripling of its balance sheet during the past three years…all with money essentially created out of thin air?

The net result according to many “experts” must be a big surge in inflation in coming years. That’s why I better buy gold and other “hard” assets, and reduce my ownership of any financial assets such as bonds.

That’s why gold is back over $1,225 per ounce, with people who market gold saying it is “a great time” to buy gold (when have they ever said anything different?) That’s why the experts say gold is soon likely to climb above $2,000.

Argument No. 2: Deflation

Let me think now — deflation is going to be a huge problem in coming years. Have you seen how residential real estate prices continue to decline? Have you seen how commercial real estate prices continue to weaken? Have you seen how much slack there is in the labor market, which could easily place downward pressure on wages? Have you seen how confidence in Washington DC is so low?

Have you seen how U.S. inflation continues to decline? Have you seen how the Consumer Price Index (CPI) now shows prices rising only 1.3 percent during the past 12 months? That the “core rate” of the CPI (excluding food and energy prices) is up only 0.9 percent during the past 12 months, the smallest rise in 45 years?

Did you see that when Japan’s asset and housing bubble burst in the early 1990s its economy went into eight consecutive years of deflation? Have you seen how the Japanese economy is dealing with deflation again?

Have you seen that declining prices are soon followed by declining incomes? Did you know history suggests that escaping a deflationary economy can be more challenging that dealing with inflation?

The net result according to many “experts” must be a big dose of deflation in coming years. That’s why I better buy high-quality, longer-term, fixed-rate U.S. government or corporate bonds and reduce my ownership of any “hard” assets, like gold.

That’s why investors have already pushed bond prices so high that the 10-year and 30-year U.S. Treasury bond investment returns (known as yields) have already fallen to around 2.65 percent and 3.75 percent, respectively…which, excluding a few weeks during the financial crisis, are the lowest levels in decades.

That’s why 30-year fixed-rate conventional mortgages are below 4.50 percent. That’s why the experts say bond prices will move even higher, with yields falling even further.

Inflation or deflation?

Two very different schools of thought.

Two very different investment plans.

{pagebreak:Page 1}