Economists and investors have been discussing the inflation vs. deflation of the last year. Most Americans support inflationists like the legendary Marc Faber and Kiyosaki with a rising tide of creepy deflationists like Mish Shedlock and Henry Dent driving people to bury what little money they have in their backyards.

Take a deep breath, step back, and objectively assess inflation vs. deflation scenarios. First, real estate is a hard asset that does well during rising inflation. Unlike gold, however, real estate requires maintenance to maintain its value. If purchased correctly and in the best location, location, location, real estate can provide a return on every dollar invested.

Few investors, or economists, would argue that asset prices have fallen dramatically, especially California real estate, which is down 30.7 percent from 2006 sales peaks, bringing to a halt deflationary concerns. If you’ve already written off foreclosure and real estate short-sale investments as unstable investments, it’s a good idea to consider how long any “deflationary” period might last before discounting these properties entirely.

For starters, dollars are not very safe right now. Hey! Foreign investors are already expressing public concern about buying our dollars. As demand for dollars continues to evaporate, expect a safe flight into hard assets, other currencies, or alternative investments. Weak dollars translate into higher prices for all commodities and tangible assets over the long term.

A truly frightening thought… The United States has printed more dollars in the last year than at any time in our national history. Supply and demand concepts have been thrown under the bus and little restraint is anticipated in the near future. Spending your way out of financial trouble seems to be Obama’s mantra. The situation is so dire that Marc Faber recently suggested that “the American economic system could collapse within 5 to 10 years.” In the New York Times (09/28/09), the World Bank President said: “The days of the United States as the undisputed economic superpower may be numbered and the dollar is likely to lose its privileged position as the euro.” Do any of us need to remember that this also applies to the renminbi, the Chinese currency, or that China’s investments in the United States are currently on shaky ground?

Lending standards have changed drastically…ask anyone in real estate or those currently applying for a mortgage. It’s like asking Attila the Hun for compassion. Billions of dollars are being sequestered by the Obama administration. My cynical assumption is that a significant portion of that $700 billion won’t be spent until the summer of 2010…just in time to stimulate the economy before the next election.

Combined with rising unemployment and reduced consumer spending, the pressure on small business owners is having a big impact. Most experts agree that this trend will be with us for the foreseeable future. Therefore, it is anticipated that manufacturers will reduce their capacity and inventory, eventually leading to shortages that will drive prices up rather than a continuous decline.

What does this mean for the average investor or short sale buyer? Tighter credit standards will make it difficult or nearly impossible for households to obtain a mortgage in the future. Adding to this unpleasant thought will be the expected increase in the cost of materials. No doubt the “green” movement will increase government regulations and increase the cost of building new homes.

My parting shot here is, this is the time to buy…people are in a “back to the good old days” mentality where home, family and safety were more important than a new Mercedes Benz, cruise ship worldwide or a luxury vacation. spa destinations in foreign countries.

Consumers should return to tried and tested real estate investments that can generate the best results over an extended period of time. The days of changing ownership are over. REOs (bank repossessions) and short sales make it possible to start with a smaller investment. This can be good for many first time buyers.