Interest Rates and Deflation

And I know, baby, just how you feel
You got to roll, roll, roll with the punches
And get to what's real
--Van Halen

Common 'wisdom' is that interest rates should decline during deflation. But we've shown that interest rates have been declining during secular inflation.

It seems more likely that secular deflation can only occur if interest rates rise. This is because low interest rates continue to promote inflation (i.e., expansion of money and credit), and governments will take this avenue every time if permitted.

The EU situation demonstrates what occurs when low interest rates are no longer part of the picture. Defaults, insolvencies, austerity, and general price declines. This is deflation.

My growing sense is that people piling into bonds as a deflation hedge may be rudely awakened when bonds tank along with stocks in a secular deflationary decline.

position in SPX