News

A Necessary Condition for Deflation is Met

Robert Prechter wrote in his January 2003 Elliott Wave Theorist about how it felt to be a voice in the wilderness: "The loneliness of the unequivocal and bearish deflationist is hard to overstate. When I traveled toNew York last October, I was told by reporters that they knew of only one other serious deflationist."

You might think, some 10 years later, that more people would have jumped on the deflation bandwagon. After all, since 2003, the world did face a severe financial crisis. Plus, the economy remains stubbornly weak despite massive stimulus by the Federal Reserve.

Consider then what Robert Prechter noted in an April 2013 speech to the Market Technicians Association (re-printed in the July-August Elliott Wave Theorist):

… Google tells you the number of times that someone somewhere entered onto the Internet the exact phrase you typed in. ... When I typed “Inflation for 2013,” there were 47,700 results. On March 13th, when I put this slide together, I also typed in “Deflation for 2013.” How many results do you think I got? The answer is 5….

Expecting deflation, to put it mildly, is a contrary opinion.

--- The Elliott Wave Theorist, July-August 2013

Complacency about deflation is a factor that makes deflation possible. That's the view of John H. Making, author of a just-published American Enterprise Institute paper titled, "Beware the Monetary Cliff."

Despite persistent inflation warnings from Fed officials and some economists, the real risk facing the Fed is a drift into deflation. In fact, an obsession with inflation threats while approaching a period of deflation is a necessary condition for deflation to occur. Another necessary condition is complacency about the threat of deflation. The Fed has observed weaker-than-expected inflation, not to mention a weaker-than-expected economy during most of 2013, but has persisted in looking for a second half-recovery in the economy and a second half-reversal in the disinflationary trend. Neither has occurred nor is either likely to emerge as fiscal drag and policy uncertainty persist.

-- American Enterprise Institute, November 2013

What exactly is deflation?

Economists define it three different ways, but I find only one definition useful: Deflation is a contraction in the overall supply of money and credit.

Why must deflation occur? Answer: There is too much unpayable debt in the world.

-- The Elliott Wave Theorist, July 2012