The Double or Nothing Scenario (where the "nothing" scenario seems to be the only realistic!) by Ektoras

Deflation seems to be the major threat right now. Reviewing history, suggests that the world suffrered deflation two times. The first time was during the 1930's and the second time was during the 1990's in Japan. We are likely to see the third time but the major difference this time is that all governments make tremendous efforts in order to reinflate the economy. This brings us against two scenarios.
In the first scenario, where these efforts prove to be succesful, inflation will increase and we should expect a huge shift from cash and bonds to equities.
In the second scenario, the deflationary forces will prove to be deeper than the inflationary ones due to the upcoming stemming from the withdrawal effects as the world adjusts to the lack of credit. As the global demand suffers and the engine of credit creation is broken we will see bonds prospering.
It seems that the necessary condition for a world recovery is the appetite for credit. Equities are entering 2009 in a recession mood and in the same time cash is too expensive in order for the credit machine to start moving. Everything shows that we are entering to an even deeper recession than we first though. In any case, we need to see how the world economy will react to the synchronised government reaction but it does not seem to be logical to be bullish under such a climate.