The Growing Case for Global Deflation

Prepare for a major worldwide economic contraction.

The evidence for global deflation continues to build.

Consider the recent plunge in the prices of commodities and Treasury Inflation-Protected Securities (TIPS).

On April 15 gold fell 9%, its worst one-day performance in 30 years. Silver has also fallen hard and the price of oil has slipped. TIPS are also sending a deflationary signal.

TIPS are adjusted for the consumer-price index, so they pay a "real" yield plus the CPI. Recently, that real yield has been negative for shorter TIPS since regular Treasuries yield less than the expected rise in the CPI; think of that negative yield as an "inflation insurance" policy. Demand for that inflation insurance collapsed last week as an auction of five-year TIPS drew the weakest bidding since the crisis of 2008, when investors wanted nothing but regular Treasuries.

Barron's, April 20

Also consider the latest from the International Monetary Fund.

I.M.F. Lowers Estimates for Global Economic Growth for 2013

The New York Times, April 16

Deflation is characterized by a contraction in credit. With that in mind, consider this excerpt from the New York Times.

The fund warned that "markets may have moved ahead of the real economy" and noted that improved financial conditions had not, in many cases, translated to better access to credit for consumers and businesses, with lending standards remaining tight. In the euro area, indeed, credit continues to contract and lending conditions continue to tighten, the I.M.F. said.

The I.M.F. also lowered its 2013 growth forecast for the United States.

In his April Elliott Wave Theorist, Robert Prechter provides his perspective on preparing for a major global deflation.

The real estate market is in the deepest shambles, but investors who believed the "Peak Oil" scenario or chased other commodities are paying the price, too.

Our primary benefit so far has been keeping readers out of the traps that each of these markets has laid for them. Another soon-to-be-appreciated benefit is keeping your money safe, which will preserve your wealth and perhaps save your life. As the citizens of Cyprus discovered, when the debt pyramid implodes, the only valuable asset is cash; if you have it, you are king; if you don't, you could starve.