deflation bearJames Bullard, president of the St. Louis Federal Reserve Bank, is warning that the risk of deflation in the American economy is growing. "The U.S. is closer to a Japanese-style outcome today than at any time in recent history," he wrote in a paper released Thursday. (The paper is available on the St. Louis Fed website.)

Gary Shilling, president of A. Gary Shilling & Co. and a well-known market bear, has been focused lately on the same theme. He recently came by our offices at DailyFinance to explain why the U.S. economy is on the cusp of deflation.

In the video below, Shilling gives his views on how people should invest in a deflationary environment. Among his suggestions: long-term treasury bonds, which he says could provide higher returns than stocks.

What about stocks? Shilling says there are better places to be, but if you insist on stocks, buy dividend stocks, because over the long term, dividends could be where the gains come from. Shilling also recommends buying shares of consumer staples companies. Regardless of what happens in the economy, people are always going to have to do laundry and brush their teeth.


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