Cycle of Deflation

A little selection from Seeking Alpha regarding "competitve deflation" which seems the next stop on the cycle.

...In the early 1930s, countries around the world engaged in competitive devaluation. The idea is that by devaluing our currency, our exports become more competitive which reduces unemployment. The problem is that currencies are a zero sum game. Our devaluation is another country’s appreciation. This means we’re effectively just shipping our unemployment overseas. Other countries don’t like that, so they devalue their currency in turn. This leads to cycles of competitive devaluation. Competitive devaluation may lead to very severe inflation, or, if the economy is sufficiently weak, it may simply lead to extreme depreciation.

What would extreme depreciation without inflation look like? The prices of everything would go up, but wages would lag. Inflation is a cycle that is led by wage growth. If there is sufficient unemployment, labor has little negotiating power so they can’t get significant wage increases. So for example, prices might rise by 50% while wages only rise 15%. We are all effectively much poorer.

I believe that extreme depreciation (with or without inflation) is a near certainty. The tricky question is when. If we have another deflationary shock to the system, there would likely be another flight to the dollar and another wave of deleveraging which would actually cause prices to drop. In the absence of such a shock, I believe we would get significant depreciation (and price increases) within one year. My best guess is that we will see a shock and therefore the depreciation is a couple of years away, but I have no confidence in the timing.

It is very hard to profit from depreciation. Safe haven assets like gold tend to preserve wealth, but won’t necessarily increase it. Moreoever, if we have a deflationary shock first, gold and other hard assets could plummet like they did at the end of 2008.

I believe the best way to position ourselves is to gradually scale into a long position in hard assets, hedged with short equities. Today, owning some gold is smart diversification. If we get a deflationary shock that sends gold down 25%, hard assets like gold, commodities, and real estate, will be very attractive purchases. So, begin to very slowly scale into owning hard assets, but make sure to leave plenty of cash to buy more on a deflationary shock. To be perfectly clear, my best guess is that hard assets fall over the next year, but I expect them to be a good purchase over the next decade. Given my uncertainty on the timing, it is prudent to begin scaling into a long position very slowly over the next few months....

This was written last year.........  It is hard to guess what to do.  Gold and silver are now on a run, but to a large extent, they merely reflect the drop in the buying power of the dollars.  Metals may decline in a deflation, but that decline is not real because the dollars you would get for it will buy more. The standard of analyzing investment is not fixed. As the article mentions, keep some cash around in case things to crash so you can buy more for the buck.  The crappy dollar could once again have value once the toilet flushes. 

At the bottom of the curve is where you need a gun.