The key decision that you have to make regading the current crisis and its effect on your investment
strategy is whether the consequences will be inflationary or deflationary.

Broadly, if you decide on inflation, your investments should emphasis commodities, gold, (some) shares,
and perhaps index-linked bonds.

If it's deflation, then you want to be in cash, fixed-interest government bonds, and perhaps some short
positions (or, hedge funds or ETF's that take short positions).

Now, it may seem obvious that the collapse of Lehman is a deflationary event - the money supply shrinks
when debts are written off, and the effects on confidence will be to tighten credit further.

But, what about the governmental response? The $85B used to bail out AIG, further untold billions to save
Fannie and Freddie, the Fed, ECB and Bank of England all injecting liquidity directly into the system?

My money is in the deflation camp, so far. But, I do expect the end-game to involve massive inflation and
currency depreciation.

What does everyone else think?

Cheers,


Credit Crunch Investor

I see deflation as a big worry now. This makes all investments worthless, apart from CASH.

It's deflation , but maybe the central bank market intervention will make it to be inflation.

surely deflation in things that people typically use debt to acquire, as debt financing is vanishing. So housing is a deflation. anything you buy in cash might expect to have high inflation. so food etc...

as you say those bail outs were highly inflationary. and the austrian school predicts that will end with the collapse of the dollar and hyper inflation.

cash and gold at the moment sound good.