This Precondition for Deflation is Met

On March 10, the Federal Reserve reported that U.S. household net worth surpassed $150 trillion for the first time in Q4 of 2021.

This is not surprising considering the substantial rise in stock portfolios and real estate values last year.

However, there’s a flip side. Debt also rose rapidly – not only for households, but for businesses and government too. This is from CNBC (March 10):

Total nonfinancial debt came to $65.1 trillion, including $17.9 trillion at the household level, $18.5 trillion in the business world and $28.6 trillion from government. Each category saw substantial rises.

Household debt jumped at an 8% annual rate, owing to a 6.9% rise in consumer credit and an 8% jump in mortgages. Nonfinancial business debt increased at a 6.7% clip, while federal government debt leaped by 10.8% after declining 1.3% in the third quarter.

It appears that a major condition for deflation has been met.

This is from Robert Prechter’s 2021 Last Chance to Conquer the Crash:

Deflation requires a precondition: a major societal buildup in the extension of credit and the simultaneous assumption of debt. … Bank credit and Elliott wave expert Hamilton Bolton, in a February 11, 1957 personal letter to Charles Collins, summarized his observations this way:

“In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:

(a) All were set off by a deflation of excess credit. This was the one factor in common.

(b) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.

(c) Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.

(d) None was ever quite like the last, so that the public was always fooled thereby.

(e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.

(f) Credit is credit, whether non-self-liquidating or self-liquidating.

(g) Deflation of non-self-liquidating credit usually produces the greater slumps.”

Self-liquidating credit is a loan that is paid back, with interest, in a moderately short time, from production. … Non-self-liquidating credit is a loan that is not tied to production and tends to stay in the system (purchases of cars, boats or homes, or for speculations such as purchases of stock certificates and financial derivatives).