The case for deflation
In his 2002 best-seller Conquer the Crash,
Robert Prechter used a common metaphor to describe
the case for deflation: a house of
(credit) cards.
The value of credit extended worldwide is unprecedented.
Worse, most of this debt is "non-self-liquidating."
Much of it comprises loans to governments, investment
loans for buying stock and real estate, and loans
for everyday consumer items and services, none of
which has any production tied to it. Even a lot of
corporate debt is non-self-liquidating. The Fed’s
aggressive easy-money policy has cruelly enticed even
more marginal borrowers into the ring, particularly
in the area of mortgages. All of these bolster the
case for deflation.
Economic and psychological cycles further support
the case for deflation. No tree grows to the sky.
No shared mental state, including confidence, holds
forever. The exceptional volume of credit extended
throughout the world has been precarious for some
time. If the trend toward increasing confidence were
to reverse, the supply of credit, and therefore the
supply of money, would shrink, producing deflation.
Two things are required to produce an expansionary
trend in credit: 1) Expansionary psychology, and 2)
The ability to pay interest. Conquer the
Crash makes the case for deflation based on seven
decades of a positive trend, wherein confidence has
probably reached its limit. This is the only forecast
that supports the case for deflation. Conquer the
Crash also shows how a multi-decade deceleration in
the U.S. economy will soon stress debtors’ abilities
to pay. These twin forces support the case for deflation
right now.
For more on deflation, Download Robert Prechter's FREE 60-page eBook, The Guide to Understanding Deflation.
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