We saw last time that the ingredients to deflation are present, this time, we look at how one can invest during these times.

Deflation, by definition, is a general decline in prices. It can be caused by reduction in the supply of money (not the case currently), reduction in supply of credit (yep), or decrease in personal or investment spending (yep). Deflation has the side effect of increased unemployment since there is lower levels of demand in the economy.

Declining demands leads to declining prices and if they persist, generally creates a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes and increasing defaults on loans by companies and individuals. Enter the Federal Reserve. They have tools (called Monetary Policy) to counter deflation…but their tools aren’t always successful. Deflation can be shortened by successful Fed action, or long if they don’t get it right, i.e. Japan has been in a period of deflation for decades starting in the early 1990s.

So, how does a person invest during such times? Answer: to be continued…


Source: www.investopedia.com