Ernie is 47 and lives near. Smart guy, in a booky way. Worked for a big municipal government in the planning department until he decided to improve himself. Went back to school and got an MBA. Now he fills my truck.

“This is killing me,” he said over the fence recently. “People see me pumping gas and they automatically think I’m substandard.” Ernie says he has sent out maybe 300 resumes and applied directly for 85 jobs. Nothing. Not an interview.

Last month Canadian employers terminated 139,000 full-time jobs, and created 130,000 part-time positions. So, those gains everybody was crowing about some weeks ago are pretty much gone, at least for now. And losing 139,000 steady jobs is a big deal – equivalent to the US shedding 1.3 million in a month, which would be a national disaster. Thank goodness some temporary or reduced-hours work was created.

But, of course, this is deflation.

Part-time employment pays less than full-time. Often employers don’t need to cough up the same benefits. It’s far easier to terminate a guy who works 15 hours a week than one who is there forty. No matching pension contributions. And much simpler to adjust payroll costs down just by juggling the employee schedule.

Don’t be too surprised at what’s happening. It’s the inevitable consequence of a deleveraging world, and there’s lots more to come. After binging on credit (debt) for the last few years, everybody is now focussed on getting the hell out. For governments, this means tax increases like the HST, plus spending cuts. For companies, a ruthless move to cut costs and salaries. For households, less spending and borrowing, which now kills real estate.

The thing about credit is that two hours after you get it, you can spend it – buying a new car with a loan, signing an offer for a mortgaged house, or drywalling your basement with a LOC. This has an immediate economic impact, as all that borrowed money gushes into the community, into dealerships, developers or Home Depots. That’s called leverage – a relatively little amount of money can create profits and jobs.

But deleverage – paying it back – is another story entirely. This takes years. Sometimes decades. New money has to be earned in order to retire the money already borrowed. In a slow economy the process is snail-like and painful.

And, most importantly, leverage gives inflation (like galloping house prices), while deleveraging yields deflation (like now). So this is the immediate future. Eventually the economy will scrape bottom and growth will resume, but that could be years off. For Ernie it means endless litres. For house prices, endless months of melt.

What should you do in a deflating world?

  • Think hard before buying anything. Houses, cars and iPhones will be cheaper in six months. This is not the advice Ottawa or the Bank of Canada want me to give, but there it is.
  • Pay down debt. In a deleveraging world it just gets harder to lose.
  • Cash in existing investment assets and use the money to dump your mortgage or your boat loan or your student loan or your RV loan. Then borrow the same amount and use it to repurchase your investments. Now your loan is tax-deductible, and you’ll have liquidity.
  • If you don’t have fixed income investments in your portfolio, get some. Interest rate increases will obviously moderate or stall for a while (after the two we’ve already had), which means bond prices are probably going up. In an uncertain world, why not have investments that pay you to own them?
  • That includes my beloved preferreds, of course. I can’t understand why everyone wouldn’t want to make 5.85% on blue chip assets that pay you dividends which are taxed 80% less than GICs. But maybe that’s just me being weird.
  • Don’t buy stocks. Buy ETFs. Unless you have millions to invest, picking individual securities simply exacerbates risk. Every schlep with an online trading account and a few equities they’ve read about in a marginal blog (unlike this inconsequential one) is pissing money away. If you can afford to lose it, then be a philanthropist and do something useful.
  • Deflation won’t deflate equity markets, but it will fuel volatility. So index funds are a bad idea. Sector ETFs are not.
  • Volatility, by the way, is the investor’s friend. If you buy on those days everyone is moaning about imminent death, you’ll usually do fine. Sell on any day you hear someone say, “this time it’s different!”
  • Be liquid. Stocks, bonds, funds, cash — liquid. Houses, Porsches, cottages, locked-in GICs, condos — illiquid.
  • Deflation plus liquidity equals party. Deflation plus debt equals divorce.

Oh yeah. Don’t quit your job.