How to position yourself for deflation

In the battle between inflation and deflation, we may soon seen deflation gain the upper hand. And if that happens, how should you invest?

If we are right in believing that inflation is not the risk but deflation is, then short- and long-term interest rates are destined to remain low. Such a belief justifies our faith in long-dated UK gilts, though it must be said we hold these with a relatively tight stop loss. When everybody finally agrees that asset prices are in an irreversible decline, then investors will hunt out safe long-term fixed income investments and gilts will soar.

As deflation bites, the present unwillingness of banks to lend to other than undoubted households and businesses, will be magnified, the authorities will print money with impunity and the banks will mimic what Japan has done in similar circumstances; hoard money on their balance sheets, probably invested in government bonds.

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