Stag/Deflation?

This is a term coined by one my gurus, Dr Rubini, of NYU. What it describes is a nightmare scenario of a Stagnant economy caused by lack of demand. It is inherently different from its similar sounding cousin, StagFlation, which is a Stagnant economy caused by an intemperate increase in the money supply.

We are probably hip deep in StagDeflation right now. Unemployment is ballooning (533,000 lost jobs last month, November, 2008) because business is stagnant due to lack of demand. Imported cars are piling up on the docks because dealers will not accept them because no one is buying them.

High unemployment leads to less demand, which leads to more unemployment, which leads to less demand...You see the problem.

In deflation, the value of everything goes down due to lack of demand. Look at oil prices, which are poised to go below $40/barrel in the next few days. Look at gold and silver, down approx 30 and 40%, respectively in the last 6 months.
The value of the stock market has plummeted 40% this year as well.

Of course the banks and financial institutions are being battered by the drop in their capital due to the loss of value of their reserves, mainly their investments in real estate derivatives. This situation is forcing them to curtail lending which again hits demand, denying credit to businesses and individuals, depressing consumption further.

The only thing going up in this environment is the lowly dollar, since the supply i8s contracting, the very opposite of what happens in an inflation.

During this period of Stagflation and collapse of the banks and financial institutions, your best money strategy is to get out of your investments and into cash, since "things" are losing value and dollars are gaining value.

You will have a great opportunity to buy back your financial assets and real estate at the bottom of the StagDeflation cycle at pennies on the dollar!

However, with banks failing on a weekly basis and hundreds of them in danger of collapse, you want to keep your money in Treasury Only money market funds. FDIC insurance is for suckers! The fund does not begin to have anything approaching enough capital to guarantee anything like the amount of losses they are likely to face if even a fraction of the banks on the Bad list fail.

Treasury only money market funds can act as both business and personal checking accounts as well as money market funds. Your money cannot be safer. The government has Never defaulted on Treasuries, not in the Civil War, not in the First Depression, not in WW2.

Now, the answer to Deflation, is Inflation, printing money and pumping it into the economy, as the government is doing to recapitalize the banks as well as to jump start consumer spending. There is usually a lag of about a year between the growth of the money supply and the onset of inflationary prices.

As gold and silver prices will rocket upward as inflation sets in and their prices are depressed now, you will want to convert some of those Fat dollars to gold and silver now. You have about a year before their prices will start excellerating at which time the dollar will drop like a stone.

Recommendation: Sell deflating financial investments, real estate. Hoard cash, invest 20% in gold, silver: http://SilverSnowball.com/964