When asked to write a guest column for the FT, a writer friend of mind gave me some sound advice: “Don’t write about something complicated that you can’t explain, or the reader can’t easily understand”. In other words, adhere to the old adage of: “Keep It Simple, Stupid” – or “KISS” for short.

But I can’t help but wonder if “KISS” is part of the reason that we got into this economic mess in the first place. The KISS mentality and the soundbite have become more prevalent as our lives have got busier. Why? Because selling us a soundbite is so much easier than selling us the sometimes complicated truth.

The great investors, however, have always been aware of the flaws and the complexity of the financial world that we live in. These people study history and thoroughly research their topics rather than relying on just a few soundbites.

One such investor is Warren Buffett, and one of his expressions has never been more apt: “It is only when the tide goes out that we see who is swimming without any trunks.”

Some of the most influential politicians, commentators and businessmen tried to “keep it simple” in the past. Many of those now look to have been skinny dipping.

If KISS and the soundbite invaded the press and politics, then they ran riot in business. We must remind ourselves that mortgage advisers, bankers, stockbrokers and estate agents are all just sales people. You only need to work in any of those industries for a while to realise that the vast majority of them at all levels of seniority are driven by “the sale” rather than by whether the buyer really understands what he or she is buying.

So, in order to achieve their sales targets, they also “kept it simple”. They realised that by doing so, they sold far more: more mortgages, more junk bonds, more private equity debt and more buy-to-let houses.

While Buffett’s tide was rising, buyers became less and less diligent and lapped up the sales soundbites.

In truth, the sellers never cared about the quality of what they said, or sold. To believe therwise is like getting the fox to watch the chicken house while you are on holiday, and being surprised at the result when you return home.

So what was the proposed subject matter for this column that elicited my writer friend’s KISS advice? Deflation.

You may have no experience or understanding of deflation, but at least you are in good company. Neither have the politicians, the bankers or commentators on whom we all currently rely. This is because deflation is very rare.

Deflation is what Japan experienced for a decade after 1990. It is what often follows an asset bubble. And it is what caused many of the western economic collapses before around 1950.

Simply put, deflation is where the price of pretty much everything – shares, houses, cars, TVs, savings rates and salaries – all fall and keep falling, so the public stops spending in
the knowledge that items will be cheaper in the future. This results in a long-lasting economic slump, from which it extremely hard to recover.

The dramatic pre-Budget Report in November was very clearly a budget to fight off such a deflationary slump and yet no politician mentioned “deflation”. Nor have many of the army of market commentators since.

Why? Imagine yourself as a modern politician asked to talk about a subject that you have little experience of, that you cannot explain or simplify into a soundbite. That is deflation.

But today, US and UK government long-dated bonds, some of the most liquid financial instruments in the world, have risen to prices where they are suggesting deflation is a very real economic prospect. Nearly all economists suggest these prices, and
the resulting low yields, are wrong and will soon be reversed, dismissing deflation as a real threat.

Remember, though, that these same economists suggested we had little to fear only 18 months ago.

What does this mean for private investors in the future?

In truth, I do not know. What I do know is that the average prediction of a 15-20 per cent bounce in the UK and US stock markets, and the forecasts of a bottoming-out of UK house prices during 2009 will be hopelessly optimistic if deflation does become ingrained.

I also know that, like the UK and US stock markets in 2008, the Japanese stock market fell 35 per cent in 1990. In the 13 years that followed, it only rose in three of them and today, 19 years later, it is a further 35 per cent lower than its 1990 closing level.

There are reasons why I hope we will not follow the Japanese example. But an understanding about the dangers of deflation will not be one of them.

During deflationary times, the one thing you want to do is save, not spend – irrespective of the lack of interest you will earn or the VAT incentives that are waved in front of you.

Maybe the one thing we can do is stop listening to soundbites and start to think for ourselves again. There, that is about a simple as I can make it.

Andrew Hollingworth is a partner at Holland Advisors, an independent corporate advisory group. Further articles on deflation, the credit crunch and financial markets can be found at www.hollandadvisors.co.uk