Worldwide Depression - Inflation or Deflation

Ok all you financial wizards, what can we expect.

As an ordinary Joe without a financial clue, I'd like a forcast of what can we expect when the world economy goes down the toilet. Will it be like the '08 crash and interest rates bottom out, OR, will there be inflationary pressure forcing up interest rates to heights seen in the 1980's of 17% - 18% (In Australia ).

I was caught out badly with the '08 crash, rushing in early to fix my home loan because rates were going up, and then the ass fell out of the market leaving me stranded. I'm trying not to get tripped up again.

I know this is crystal ball gazing, but with the level of expert opinion on ATS whats the likely senario if Greece, Portugal and one or two other basket cases go belly up.

Well, if the interest rates stay low, we're heading towards high if not hyper inflation.
If they raise them to fight inflation, we'll head towards a long terme depression with low inflation or deflation.

There has been so much credit creation and printing of money in all developed nations that it seems the long-term result will be global inflation:

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Right now most of this money is sitting in big banks and not being loaned out:

[atsimg]http://files.abovetopsecret.com/images/member/3f0c1cd603cc.png[/atsimg]

Given the fact that the excess money/credit that has been created has not yet "trickeled down" to the general public, for the short-to-medium term, we are seeing falling prices in most places (deflation).

If I had to guess, I would say we will see deflation for a while, then the money/credit that has been created for the big banks will start to make its way to the general public. We will hit a brief "sweet spot" where it seems everything is OK and back to normal, and you will read lots of stories about how all problems have been solved. Doom and gloom will again go out of fashion. But given the raw amount of money created, this "sweet spot" probably won't last for long, and it will be quickly replaced by strong inflation if not hyperinflation. It will be difficult to reign in this inflation because so many people/companies/governements are in debt that raising interest rates will be a killer.

I think deflation except for food which will go up quite a bit. The deflationary period will last probably 1 - 2 years. This is the end of a credit cycle so deflation and deleveraging must occur. Govts must print money to fill the void. The banks will continue to horde cash because they are being told to not lend it out significantly (this would cause inflation).

Once everyone realizes that the great recovery is not coming (probably by April of this year), stock market will begin to seriously drop. Gold will drop. The US dollar, despite all the debt in the US, will surge because it is still seen as the "best of a very bad lot." Home prices will plummet as the market gets flooded with eager sellers who understand that "Spring is the time to sell!!" Unfortunately, there will not be enough buyers.

Unemployment in US will begin ticking up again and companies will cut back with no recovery imminent. The Fed will keep interest rates at zero for the year.

That's the basics - just my opinion - but I honestly see no way around this scenario. There will be possibly other shocks and maybe some unexpected lifts here or there. How it will play out for people like you and me - who knows? I would just do what so many have already talked about over and over and over again as far as "preparation."