The biggest question facing investors today

I had a great time at the MoneyWeek conference on Friday. The talks were all extremely interesting, and I enjoyed the chance to have a chat with so many of you in person.

As for the main theme that arose from the conference: well, I already knew you were interested in house prices. And I already knew you were interested in gold.

But the biggest question oneveryone's minds is still the one we've all been asking ourselves ever since the credit crunch of 2008.

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"Do we face inflation or deflation?"

So which is it? And what does it mean for your investments?

The most important chart you'll see this year

There was a lot of competition for most important chart of the day' award at the MoneyWeek conference on Friday. But in the end, I think Merryn Somerset Webb's chart of the Bank of England bank rate over the past 300-odd years took the title.

You can see the chart for yourself here: This crisis isn't over. Here is the chart that proves it.This crisis isn't over. Here is the chart that proves it. It won't tell you anything you don't already know. The Bank of England bank rate, currently at 0.5%, has never been lower.

But here's what the chart does achieve vividly: it gives you some perspective. It reminds you of just how extraordinary our circumstances are right now.

This point really came home to me while I was watching James Ferguson's presentation on the banking sector. James was pointing out that deflation is still a major risk. His point is that the banks are broke. They haven't written off enough bad debt yet to be secure of the condition of their balance sheets.

So that means credit conditions are tight, regardless of where the bank rate stands. Good value home loans are difficult to come by unless you have a big deposit and a pristine credit rating. And the interest rates charged by credit cards have rarely been higher.

What James is saying is common sense. Just think about it for a moment. If our economy was anywhere near normal at the moment, and the bank rate was 0.5%, inflation would be rocketing. The fact that it's only' at 5% or so, instead of double-digits and rising, just shows how crippled the lending sector is.

Money supply growth is fizzling out

You can see this problem in the money supply data. This is a key measure of how rapidly money is circulating in an economy. Growth is slowing sharply in all three major economic areas, from the US, to the UK, to Europe. In a credit-based economy, if credit doesn't expand, the economy doesn't grow.

Central banks have managed to keep the game going by embarking on what would normally be extremely inflationary policies. And yet all they've delivered is a very fragile recovery which looks increasingly under threat.

(As James pointed out, they've also increased the gap between rich and poor by redistributing money from the less well-off to the rich, which is quite a scandal given that central banks are entirely unelected. But that's a story for another day.)

This fizzling out of money supply growth is one reason why James reckons the Bank of England might feel the need to do more quantitative easing before the end of the year. So forget about bank rate rising from 0.5% any time soon.

However, in the US, it's a tougher call. The political environment is far more hostile. James reckons QE3 might not appear over there until next year at the earliest.

What can investors do?

Of course, if our economies start sliding towards deflation again, governments will almost certainly try out even more inflationary policies. That's why the general consensus among the panel was that while we're facing deflation directly ahead, inflation has to come at some point in the future.

So what does this mean for investors? In Britain, I doubt we'll see all-out deflation or to be more precise, I doubt we'll see prices falling, even if credit does shrink. As a nation, we seem to have an almost unique talent for making sure the cost of living just keeps climbing. If the Bank of England feels forced to do more QE, it would only send the pound lower, and inflation higher. What we'll get what we're already getting in fact is stagflation.

That's why I feel quite happy suggesting that if you haven't already done so, then take advantage of the National Savings & Insurance certificates now, before they withdraw them. The worst that can happen is you get a real return on your savings for the next five years. Sure, if inflation does fall, you might find that other products would have offered a better return over the period. But the important thing is that you certainly won't lose money and you can't say that for many investments.

As for other investments, I think we're going to see quite a strong dollar bounce in the months ahead (and our trading expert John C Burford agrees with me on this one. You can sign up for his free email here). That's one reason why I'd be wary on commodities, and broader markets in general. Again, that's another argument for sticking with defensive, dividend-paying shares rather than more cyclical ones.

But regardless of any dollar bounce, I'd stick with gold. It may fall back, but it doesn't seem worth getting out then trying to time a point to get back in it's too easy to lose your position altogether.

I've only touched on the surface of what was discussed at the conference here. I haven't mentioned Tim Price's take on the commodity supercycle, or the six signs that Dominic Frisby reckons will tell us the gold bull market is ending, among many others. So if you'd like to get hold of a recording of the conference, click here. We'll be taking orders up to the end of the week, so do get in quick if you want a copy. I know I'm biased, but I'd highly recommend it. It's worth it for the panel session alone, which was like having a front row seat at a MoneyWeek roundtable.

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