Bank credit expert Hamilton Bolton did a study of major depressions in the U.S. since 1830 and noted that they were all set off by deflation: i.e., contraction of excess credit.
The world's most recent brush with a deflationary depression was the 2007-2009 financial crisis. Even though financial "Armageddon" was avoided, it's well-known that excess leverage was the culprit.
But, this was not the big one.
Just six years later, the March 2015 Elliott Wave Theorist -- a financial publication written by Elliott Wave International President Robert Prechter since 1979 -- noted the return of troublesome amounts of debt:
Large gobs of non-self-liquidating (consumer) debt are poisoning the financial system. Yet all governments and central banks have to offer to counteract the deadly effect is…more poison. The lure of zero interest rates is sucking people into borrowing money that they will not be able to repay.
So, EWI's analysts were not surprised by an October 2017 International Monetary Fund warning, which a CNBC headline summarizes (Oct. 11, 2017):
People and companies are piling on debt at level last seen just before the financial crisis, according to the IMF
Relatedly, the New York Fed showed this chart of debt through the Q4 of 2017:
Aggregate household debt balances increased in the fourth quarter of 2017, for the 14th consecutive quarter, and are now $473 billion higher than the previous (2008:Q3) peak of $12.68 trillion. As of December 31, 2017, total household indebtedness was $13.15 trillion.
So, the financial system is in an even more precarious state than it was over 10 years ago.
Yet, in 2018, the subject that's capturing many financial headlines is not the prospects for deflation, but inflation. Here are just a few:
- Fed leaves rates unchanged and says inflation is moving higher (CNN, May 2)
- Inflation's Real Threat to the Economy (Bloomberg, Feb. 14)
- [C]hief market strategist … says rising inflation is the biggest risk [Business Insider, Jan. 20]
Observers are minimizing the tremendous growth in debt as they focus on the rebound since the depths of the Great Recession. Put another way, most people are extrapolating the recent trend into the future. Elliott Wave International's research reveals that the majority almost always do.
But, trends change, and often times dramatically.
It's well to keep in mind this comment from the April 2018 Elliott Wave Theorist:
History will eventually put today’s globally shared delusion into perspective. … We can see the cosmic alarm clock that is about to jar the world awake.
Indeed, the fact that so many observers expect inflation just adds to the likelihood of the development of deflation.