Deflation is on the March

Inflation is retreating…deflation is on the march. Food prices were increasing at about a 10% annual rate in July. In August, the increase slowed to 7%. The whole world economy is slowing down. And the bubble system – in which exports of borrowed consumer cash from the United States resulted in huge piles of capital overseas – is slowing down.

So far, everything is happening more or less as it should. The credit bubble has burst. The feds are trying to reflate it. But asset prices are sinking anyway…and so is the rate of consumer price inflation.

The Treasury market reflects the shifting fortunes of inflation and deflation too. Yields on the 10-year note fell to 3.4% this week, which means bond prices are going up. The smart money is said to be rushing into Treasuries to protect itself from falling stock prices, bankruptcies, defaults, derivatives, junk debt and other dangers.

Should you follow the smart money? We don’t think so. It may be true that Treasuries will do well during this phase. But there is no margin of safety. At 3.5% yield, you are earning at least 200 basis points less than the rate of consumer price inflation. And when this phase ends, bonds will collapse too. When it will happen, we don’t know…but sooner or later, it seems inevitable.

No, dear reader…we’ll stick with our formula: Sell stocks on rallies. Buy gold on pullbacks. Gold is a good buy right now. Stock up on the yellow metal now – with change you find between the couch cushions.

*** The Dow bounced Tuesday – predictably. Oil fell $4 and change – to $91.

(We must admit…we’re feeling rather content with ourselves. We warned that oil would correct to under $100…and so it has.)

Gold, too, has corrected all the way to $742 (more than we expected…but at least our well-earned humility is intact.) And the euro lost a little ground yesterday. It now trades at $1.40.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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