If the market craters due to deflation, I would avoid all debt and just save, save, save. If the market cratered as in a 'normal' cycle, rebalance the portfolio and buy more.
Why would you not be buying more if deflation was the cause? I mean, yeah, cash is king, IF you can time things--I.e. you know when it'll bottom. If you don't, might as well DCA through the down, and back up.
If one were committed to asset allocation and rebalancing, that is what one would do. But...
This is from Irving Fisher at:
https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf I was unable to accurately quote all of his comments, but this is the gist of his description of deflation.
"27. In actual chronology, the order of the nine events is somewhat different from the above "logical" order, and there are reactions and repeated effects. As stated in Appendix I of Booms and Depressions:
The following table of our nine factory, occurring and recurring (together with distress selling), gives a fairly typical, though still inadequate, picture of the
1 Many of these interrelations have been shown statistically, and by many writers. Some, which I have so shown and which fit in with the debt-deflation theory, are: that price-change, after a distributed lag, causes, or is followed by, corresponding fluctuations in the volume of trade , employment, bankruptcies, and rate of interest. The results as to price-change and unemployment are con- tained in Charts II and III, pp. 352-3. See references at the end of this article; also footnote 2, page 345, regarding the charts.
Digitized for FRASER
http://fraser.stlouisfed.org/Federal Reserve Bank of St. Louis
IRVING FISHER 343
cross-currents of a depression in the approximate order in which it is believed they usually occur. (The first occurrence of each factor and its sub-divisions is indicated by italics. The figures in parenthesis show the sequence in the original exposition.)
,,,
Mild Gloom and Shock to Confidence Slightly Reduced Velocity of Circulation Debt Liquidation
Money Interest on Safe Loans Falls
But Money Interest on Unsafe Loans Rises
Distress Selling
More Gloom
Fall in Security Prices More Liquidation
Fall in Commodity Prices
Real Interest Rises; REAL DEBTS INCREASE More Pessimism and Distrust
More Liquidation
More Distress Selling
More Reduction in Velocity
More Distress Selling
Contraction of Deposit Currency
Further Dollar Enlargement
Reduction in Net Worth Increase in Bankruptcies More Pessimism and Distrust More Slowing in Velocity More Liquidation
Decrease in Profits Increase in Losses Increase in Pessimism Slower Velocity
More Liquidation
Reduction in Volume of Stock Trading
Decrease in Construction Reduction in Output Reduction in Trade Unemployment
More Pessimism
Hoarding
Runs on Banks
Banks Curtailing Loans for Self-Protection Banks Selling Investments
Bank Failures
Distrust Grows
More Hoarding
More Liquidation
More Distress Selling
Further Dollar Enlargement"
And later he writes:
"And, vice versa, deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liqui- dation of debts cannot keep up with the fall of prices which it causes.
In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen theirburdenofdebtsincreasesit,becauseofthemasseffectofthestampede to liquidate in swelling each dollar owed. Then we have the great para- dox which, I submit, is the chief secret of most, if not all, great de- pressions: The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing."
Deflation takes time so I would mostly pile up cash, yes, and, if I were brave, rebalance every year, but holding my nose.