Wall Street pundits are currently debating whether we will segue into a period of inflation or deflation. Both of these have their challenges for investors, although (as we have said many times) inflation would be the lesser of the two evils. Fortunately, the argument for deflation has some serious flaws.

 

We understand why some argue for deflation. Capacity utilization is at a record low, while the American consumer faces a tough situation. His income has either fallen or stagnated. Certainly his wages are not rising. He pays higher gasoline prices which cramp his lifestyle. He may also face new taxes if President Obama's healthcare scheme gets traction. The best case scenario for U.S. growth may be 1-2% a year. Maybe 3% for a quarter or two. But the days of sustainable 3.5% growth are long gone. So far we agree with the deflationists.

 

But deflation isn't the whole story. The deflation argument depends on the false belief that what happens in the U.S. will spread to the entire world economy. That in turn only seems reasonable if your perspective is firmly lodged in the 20^th century – a time when the U.S.