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CDs and deflation

By Sheyna Steiner ·
Friday, August 6, 2010
Posted: 5 pm ET

I just finished a story on deflation for Bankrate, it should be up next week. One thing I didn't know about deflation prior to last week is that it can be very bad for investments.

Obviously, I didn't know a whole lot about deflation. In my defense, it's a state of affairs that barely any living citizens of the U.S. have experienced, unless they recently emigrated from Japan or lived through the Great Depression.

Deflation has been the watchword for a few weeks now, at least in the mainstream media. It came to head recently when James Bullard, president of the Federal Reserve Bank of St. Louis released a research paper that stated that deflation could be a possibility.

Also widely discussed, the Pacific Investment Management Company's  chief executive officer, Mohammed A. El-Erian, said that he believes that the chance of deflation in the U.S. is as high as 25 percent, reported.

In a deflationary environment, CDs are a great place to be. They are government-insured, easy to understand and most importantly, your principal is protected. For the story I wrote on the subject, I interviewed Mickey Cargile, managing partner of WNB Private Client Services and Cargile Investments.

He stresses that if deflation hits, just moving to safer investments would not suffice, they should be very, very safe.

"In a deflationary period, dollars are king. Hold cash or cash equivalents. If you can make some nominal amount of interest and guarantee you'll get your principal back, even better. That would be investments such as FDIC-insured CDs or Treasury bonds," he says.

Whether or not you believe deflation is headed for the U.S. economy, CDs can be a good place to park some extra money. Though CD rates aren't setting the world on fire at the moment, you can use Bankrate's rate tables to find above average rates anywhere in the country.

What do you think about the risk of deflation? Is it a real threat or just more the-sky-is-falling hype?

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