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Deflating the Inflationists' Arguments
The latest raging argument is about whether the U.S. economy is heading toward hyperinflation or deflation. Readers of Elliott Wave International's web site know that we come down firmly on the side of deflation. In fact, Bob Prechter wrote the book in 2002 that predicts a deflationary depression. It's called
Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression.
The argument for hyperinflation seems simple and elegant -- that as the Fed continues to print more paper notes to try to jumpstart the economy, the dollar will lose its value. But what sounds so right can also be so wrong. Here's how Bob Prechter explains it in his most recent Theorist:
Comprehensive Market Commentary: This Special 2-part Theorist explains how the bear-market rally is maturing along with a bonus 1-hour video of Bob Prechter's recent speech at Bloomberg's headquarters to a symposium of the Market Technicians Association.
Read more about it here.
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As Joe Granville so elegantly put it, “What is obvious is obviously wrong.” Our job is not primarily to figure out what’s wrong with the obvious case but merely to figure out when a case is so obvious that it is likely to fail. The inflation/hyperinflation case—if only because of its popularity—is highly likely to fail.
Nevertheless, I also continue to believe that the inflationary arguments are fundamentally wrong. That the Fed and the government are failing to bring back inflation seems quite evident to me. They worked overtime for a year and a half to force “liquidity” into the system, and the markets did not just fail to soar, did not just fail to hold up, did not just drift downward, but collapsed throughout that time.
Now that a temporarily rising social mood has naturally led to some reflation, people think the Fed’s machinations are “working.” But long-term interest rates are rising to choke them off. The Fed announced a campaign to buy T-bonds to keep long term rates down, and those darned rates just won’t cooperate! Sorry, but there is no free lunch. You can’t beat deflation in a credit-based system.
Comprehensive Market Commentary: This Special 2-part Theorist explains how the bear-market rally is maturing along with a bonus 1-hour video of Bob Prechter's recent speech at Bloomberg's headquarters to a symposium of the Market Technicians Association.
Read more about it here.