Keeping An Eye On The Other ‘Flation

You don’t hear much talk about deflation. It’s something economists and investment managers don’t spend much time talking about. Deflation is as worrisome for a good many as watching Kate Gosselin attempting to pirouette on Dancing  With The Stars. (Oh, she’s gone and I can look now?)  

Japan spent a decade with deflation and couldn’t shake it. In fact deflation is an economic disease that once it gets into the system there is nothing the government can do except hope it works its way out as soon as possible.

There are some whispers, with the economic problems of Greece, of a creeping global deflationary trend. While it is not quite imbedded as a sure thing the symptoms are there so that it is causing some very smart people to worry.

With deflation, the opposite of inflation, prices fall because there is a lack of a demand for product. As prices get lower, more product stacks up on shelves and businesses have to start laying off workers until finally a lot of people cannot afford to buy anything and others are afraid to. You can readily understand why the recent surprisingly positive domestic retail report was so welcome to Obama administration big shots and investors.

Still there are global grumblings that need to be paid attention to. Dow Chemical reported that its prices on products fell worldwide 17% in 2009. Also, some consumer prices only increased by 1.3% in February 2010, the smallest increase in 6 years. European nations are already concerned about deflation. In Ireland prices fell for the 12th straight month and Spain and Portugal prices were down seven out of the previous 12 months.

So while we look forward to massive inflation the reverse could possibly happen and in that scenario there is little the government, Obama or business can do to right the economy in a relatively short time. If it happens on a global scale investment portfolios will need to be completely reallocated to prevent them from stagnating and even turning upside down.

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