Consider These Prospects for a Deflationary Depression

Yes – the cost of living has risen substantially during the past year and a half or so.

And an opinion writer for Marketwatch acknowledges this. Even so, he says to expect deflation down the road (July 14):

The most recent headline CPI came in at 9.1% so it might seem odd to think that the risk of disinflation and deflation is rising.

But while the CPI is a rearview-looking indicator, many forward-looking indicators are starting to tell a very different story – a story of falling demand and falling prices.

Relatedly, Elliott Wave International President Robert Prechter explains why “deflationary crashes and depressions go together” in his book, Last Chance to Conquer the Crash:

A deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people’s desire and ability to lend and borrow. A depression is characterized in part by a persistent, sustained, deep, general decline in production. Since a decline in credit reduces new investment in economic activity, deflation supports depression. Since a decline in production reduces debtors’ means to repay and service debt, a depression supports deflation. Because both credit and production support prices for financial assets, their prices fall in a deflationary depression. As asset prices fall, people lose wealth, which reduces their ability to offer credit, service debt and support production.

Further, in his just-published July Elliott Wave Theorist, Robert Prechter says:

I don’t think the economy is in a recession. I think it is in a depression. It will develop over the next three years.

The economy usually lags downturns in stock prices by three to twelve months. September 1929 was one of the few times the economy turned down in tandem with stock prices. The year 2022 is probably on the same path.

A depression is not obvious in its first, second or even third quarter. It becomes obvious at the bottom. But the entire period of contraction is still a depression.