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Wednesday, August 18, 2010

Early deflation indicator?

Iceland's central bank has cut a "key" interest rate to 7%, down a full percentage point.

For those who don't typically keep up with financial news, Iceland was an early casualty of the current worldwide economic crisis. The Icelanders discovered that their economy was built upon a house of cards, and chaos followed -- at least, low-key, relatively polite Nordic-style chaos. For some months, the country has been attempting to put the pieces back together.

The bank issued a statement saying that inflation had declined "much faster than forecast".

The question before us is this: Does the current state of the economy in Iceland anticipate conditions in the USA?

Several well-informed persons, whose opinions yours truly listens to closely, have opined that widespread deflation is likely. Now, deflation is a phenomenon that most Americans currently alive have not experienced. Basically, prices decline. Wow! Great!

Not really. Deflation is a mixed blessing, at best. As prices decline, so does the value of many forms of wealth -- including things like your house, your retirement account, and even "solid" wealth like precious metals.

At this point, no one can predict exactly how such a scenario might play out. But the chances are good that you wouldn't like it.

Some thinkers believe that deflation would be followed by massive inflation, and that by a general economic collapse. Others differ, but most of the possible scenarios are unpleasant.

"What can we do prevent it?", you might ask. As a nation, very little. The global economy is actually more unstable than most people realize. We're just waiting for the hammer -- maybe the first of several -- to fall.

You can, and should, do what you can to prepare for bad times personally. Pay off whatever debt you can. Keep extra food on hand. Get to know your neighbors. If you have never been a person of faith, at least be open-minded enough to explore the idea.

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