The Truth about Deflation
Source: itulip.com, Eric Janszen (10/27/08)
With all of this panicking into dollars we get asked a lot about deflation...Take-away: No gold standard, no deflation spirals. Ever again.
The essence of Ka-Poom Theory is that after the phony credit-based boom ends, first the dollar rises and inflation falls before dollar repatriation and government reflation policies kick in. We don't think the transition from disinflation to inflation is trade-able because we expect it to be chaotic. But we don't blame readers for trying, or wanting to.
This ain't deflation...
Deflation was common back in the days when there was something for a currency to deflate against for more than a brief period of time before the government got involved: gold. Even then, governments often abandoned the gold standard to inflate the money supply to stop deflation, especially in times of war. If you are a government and need to inflate and there's no war to fight, then make something up–like an oil "shortage" in the 1970s...
Take-away: No gold standard, no deflation spirals. Ever again... The Truth About Deflation