Bonds Default in Deflation

[Grampus Mud]

I notice some confusion on other forum about performance during deflation. Most are under the impression bonds protect against deflation.

This is not correct. Bonds thrive in a disinflationary environment.

If we have deflation...real deflation...then debtors lack pricing power and can't pay back loans in a currency that's getting ever stronger. BONDS DEFAULT IN DEFLATION.
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[Raryn]

The last time we had any significant deflation in the US was 1930-1933. There's a few years in there with a CPI change barely below zero (2009 was -0.4%), but those are barely a blip in the overall trend.

Somehow I'm not too worried.

 

[Grampus Mud]

The last time we had any significant deflation in the US was 1930-1933. There's a few years in there with a CPI change barely below zero (2009 was -0.4%), but those are barely a blip in the overall trend.

Somehow I'm not too worried.

And what happened in 1934? What did FDR do?

Table 1. Unpaid allied wartime and postwar debt owed to the US and the UK: The 1934 summer defaults

Oh it's going to happen again and it will be much bigger this time. The people that remember these events have died. This is the secular cycle spanning a single lifetime and it's why it surprises everybody.

 

[Grampus Mud]

“There are decades where nothing happens; and there are weeks where decades happen.”---Lenin