“In deflation, cash is king,” says Welsh. “In the short run, Treasury paper [is] the safest game in town, no matter how low the yields are. But will that continue indefinitely? I doubt it. The government has issued so much debt that eventually it will have trouble selling bonds, and interest rates will rise and bonds fall in price.”
Here is a sobering thought. In the 1970s, the nation suffered high inflation and interest rates. Then in the 1980s and 1990s, as interest rates declined, both stocks and quality bonds enjoyed a rowdy bull market. That ended for stocks in 2000, but the bond bull market is still going. Today, however, short-term interest rates are near zero and long rates are as low as they have been in half a century. So it’s doubtful that there will be a joyous orgy in either stocks or bonds unless there is first high inflation and interest rates — that is, lots of pain.