Inflation or deflation?

What’s ahead for 2009 — a deflationary slump where consumers wait to buy because prices keep going down or an inflationary slump where business limps along and prices keep rising to offset the increasingly worthless dollar?
Your guess is as good as mine. And don’t look to the experts for advice, either. They’re stumped, too.
We’re entering strange, uncharted economic waters, making existing maps reassuring but probably useless.
Consider the monumental changes that already have taken place. Our traditionally separate investment and commercial banking systems are now one. More important, the nation’s largest banks effectively have been nationalized.
If you don’t think Barney Frank is now a decision maker as important to our nation’s savers, investors and borrowers as Jamie Dimon is, think again.
Socialism American-style is also coming to the auto industry. Soon we’ll have the solons of the Senate deciding the appropriate business model for General Motors — as well as which models of Cadillacs and Buicks to produce.
All these steps were taken in the name of getting the economy going again. Pour in the liquidity, goes the thinking, and lenders will lend and consumers will consume.
Unfortunately, lenders are only sort of lending and consumers are only wanly consuming.
According to this year’s gloomster poster boy, economist Nouriel Roubini, “deflation in 2009 is a real possibility.”
A 30% fall in home prices from their peak, which is entirely possible, Mr. Roubini says, would create a negative wealth effect that could subtract $400 billion to $500 billion from private consumption.
On the other hand, as economists are wont to say, the steady torrent of liquidity raining down from the Fed and Capitol Hill probably will inject almost $1 trillion into the economy.
That should stimulate demand if history is any guide, but what will consumers buy? More houses? More cars? What if they don’t have jobs?
An even bigger question: What happens when everyone, domestic and foreign, suddenly wakes up and realizes that there are an awful lot of dollars floating around? Like any other commodity, dollars will go down in price when people don’t want them, which will make the stuff we all buy more expensive in dollar terms.
For investors and their advisers, the inflation/deflation question only adds to the conundrum of where to invest, now that the markets have erased years of gains.
How about a Treasury bond that pays no interest? What about a municipal bond from a state or city that’s reeling from property tax shortfalls? Or maybe shares in a company that’s now partially owned by the government?
Sorry for raising so many questions. But when a dollar a year from now may be worth $1.15 or 85 cents or who knows how much, what’s an investor supposed to do? And what should an adviser recommend?
I wish I had the answers. Do you?

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