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I'm not an economist, but I try to follow the message of the markets, and economic stats closely. One tries to discern what's down the road, and trade or invest accordingly.

The BIG question since the financial implosion of 2007-2009 has been: inflation versus deflation? 0% interest rates versus lack of demand for loans. Declining demand versus stimulus money "creating" demand.

For myself, I've come to a conclusion. Except for a couple of monetary blips here and there it's been deflation all along. Or, should I say the underlying theme of the 2000s has been deflation, offset to some degree for part of the time by governmental-induced inflationary episodes.

Since the US stock markets crashed in 2000-2002, ultra-low interest rates and massive governmental spending and deficits have boosted assets prices, for a while. There was a nice bull run in equities and commodities from 2003 to 2007, and a corresponding decline in the US dollar. We also had a massive housing bubble. All these asset price changes are interrelated and inextricably tied.

SInce the US Dollar declined steadily from 2000 to 2007, the rise in commodities, and rise in equities expressed in other currencies was not nearly as impressive. Expressed in Aussies or Swiss Francs, the rise in US stocks was anemic. The rise in commodities was much more robust across all currencies, but, like housing, was mostly a bubble. Oil at $150 and no war? Bubble.

Beginning again in 2007, and continuing to this day, deflation has taken over and routed the best efforts of central banks in Japan, the US, Europe, and China to avoid a depression and deflation. Employment is declining almost monthly. Underemployment is soaring. Wages are stagnant if not declining. Demand is declining. Money supply (not the money that Goldman Sachs (NYSE:GS) trades from its prop desk), but money in the economy is drying up. Fewer loans. Fewer credit cards. Excess capacity in everything. Falling prices. Falling housing prices. Falling stock prices.

So, one simply way to look at 2000 to 2010 is this: deflationary collapse until 2003. Government stimulated inflationary bubble from 2003-2007. Deflationary collapse from 2007 until now. Problem is, the deflationary bubble bursting in 2007 -2009 took out the banking system, and took out housing prices, as well as taking out commodity prices and stocks prices.

In March of 2009 the forces of deflation climaxed, and inflation resumed. The US dollar began to slide, commodities began to rise, and stocks resumed their assent. It you look over the charts you'll see how all tightly correlated the forex, commodity, and stock markets have been the past ten years.

It's now clear to me that regardless of 0% interest rates and stimulus spending the US is already on the same deflationary collapse trajectory that Japan has been on since 1989. Thus, the US dollar and cash will be king for a while, again, just like during the 2007-2009 collapse, and, I would anticipate falling commodity prices, and falling stock prices. Unemployment will continue to rise, housing prices will continue to fall. Banks may have another round of near death experiences.

It's time to be thrifty.

Disclosure: Long ZSL, GLL

Source: Deflation: Back with a Vengence