Investors split over the deflation dilemma

Investors split over the deflation dilemma - Investors...

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Investors split over the deflation dilemma By Richard Milne Published: October 14 2010 19:04 | Last updated: October 14 2010 19:04 Investors are torn between two extremes. Is the US heading for a decade of Japan-style stagnation characterised by years of falling prices – or will the hundreds of billions of dollars likely to be pumped into the economy by the Federal Reserve lead to the opposite: rising inflation? More FT video That is the biggest unanswered question in financial markets. On Thursday, the near certainty of Fed action drove the dollar to its lowest level this year against a basket of currencies. Yields on short-term government debt hit record lows. The fixed returns and relative safety of sovereign bonds should make them an attractive bet in a deflationary world. But stocks on Wall Street and in Europe are also rallying strongly, while the prices of many commodities are soaring . If deflation is imminent, there is no sign of it in equities and commodities trading. In fact, shares are rising on the belief that a big dose of quantitative easing will encourage bank lending and keep the dollar low, leading to stronger growth. That, the Fed hopes, will lead to rising prices . “Investors are quite schizophrenic at the moment. They are worried about deflation in the short term but are concerned further out about inflation,” says Keith Wade, chief economist at Schroders, the fund manager. “It means they will have to change horses over the next year or two.”
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This note was uploaded on 11/06/2010 for the course ECON Econ taught by Professor Liasa during the Spring '10 term at University of San Francisco.

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Investors split over the deflation dilemma - Investors...

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