There is much to support this cloud’s silver lining. Unfortunately, that “silver lining,” which you as a reader of this book are more likely to benefit from, is more likely to occur if deflation occurs before inflation. Are you beginning to see how this world economic storm may just play out? See for yourself in this next chapter entitled Deflation or Inflation.
Deflation or Inflation
Deflation
As you sit there and read the beginning of this sub-chapter entitled Deflation you start to feel uneasy and almost dizzy with the possibility of Deflation just ahead - not to slight the fear that you are feeling on the prospect of inflation or hyper-inflation to be discussed next. Remember when you were younger and would get sick how your mom or dad would have some awful tasting medicine that you had to take. Well, didn't you feel better in a few hours or a few days?
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Just as that awful tasting medicine helped you feel better when you were younger, you'll find that difficult economic times ahead will also be well worth it for the way in which it will heal the financial ailments in our country. By so doing, it will help to insure better economic years ahead for future generations, too. So, focus on those benefits as part of "the silver lining" of the storm clouds ahead.
Deflation is virtually a non-existent word relative to the business life of most baby boomers in the world. Inflation, on the other hand, is “the economic buzzword” of the boomers' business education. In his 1981 inaugural address in succeeding the four year term of President Jimmy Carter whose double digit inflationary rates traumatized our nation, Ronald Reagan answered these widespread fears making the fight against inflation the primary focus of our economic thoughts thereafter, as follows:
These United States are confronted with an economic affliction of great proportions. We suffer from the longest and one of the worst sustained inflations in our national history. It's distorting our economic decisions, penalizing risk, and crushing the struggling young and fixed income elderly alike. It threatens to shatter the lives of millions of our people.
In its simplest terms, economic deflation is a decrease in the price of goods and services. With the historical perspective offered by such sound thinkers as Joseph A. Schumpeter, Hyman P. Minsky, and Irving Fisher – just to cite a few, we understand that deflation is concerned with a decrease in the money supply and credit, which leads to a decline in prices.
Deflation comes with deep financial losses, more corporate bankruptcies and much higher unemployment. But, those consequences are largely unavoidable anyway. Moreover, there are major lasting benefits that accrue deflation; a much needed reduction of burdensome debts; punishment to those who caused the crisis and rewards to those capable of ending the crisis; and, a strong US dollar. [cccxxii]
The historical records, of course, points towards a deflationary depression…. In spite of overall price stability, some product prices will fall sharply. Luxury items and real estate, being expensive, are subject to greater price fluctuations than the necessities, at least in absolute terms. When the depression comes, these items, along with oil, raw materials, and farm products will experience a serious deflation, while the cost of services will probably keep rising. [cccxxiii]
Today, Americans are feeling a sharp decrease in money supply and credit despite the money being printed aggressively by the Fed. Everyone knows how fearful banks became after the housing collapse a few years ago. As such, banks were not making loans. Equally, citizens were shunning credit and starting to save again. Today, that picture is changing slightly, as seen in this chart:
The whole gist of what's going on [with recovery] is in the hands of the U.S. consumer, and that's a problem for the bulls for three major reasons:
Borrow & Spend No More: After a 25-year "borrowing and spending binge," the ability of U.S. consumers to borrow (especially against their house) is severely constrained. After years in which U.S. workers borrowed in order to make up for punk wage growth, we have reached a "watershed" moment on this front.
Golden Years: The U.S. consumer is in a savings mode and that's especially true of aging Baby Boomers, who are going to be less willing to spend as they approach retirement - especially after the shellacking 401(k) accounts took in 2008.
Got to Have a J-O-B: Yes unemployment is a lagging indicator but it's lagging more this time around vs. in prior recoveries. [cccxxiv]
As Americans are able to borrow once again, savings are also beginning to decline. This is not a healthy trend reversal, as it sets people up for the surprise "rain storm." Deflation may still prove to be this storm's economic pattern.
More concerning is what markets always seem to do when they turn. This massive turn will surely hurt far more people if borrowing should continue to increase while savings decline, as pictured here:
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As you may have already realized, Bob Prechter believes strongly that America is going into a deflationary depression based on his Elliott Wave analysis and his work in socio-economics. He makes possibly as strong a case for deflation before inflation as anyone studied over the years and in writing this book.
In drawing from Chapter 13 in his book Conquer the Crash entitled Can the Fed Stop Deflation? Prechter offers these insights on the subject:
Seventy years of nearly continuous inflation has made most people utterly confident of its permanence. If the majority of economists have any monetary fear at all, it is fear of inflation, which is the opposite of deflation. Anyone challenging virtually the entire army of financial and economic thinkers must respond to their belief that inflation is virtually inevitable and deflation impossible. Countless people say that deflation is impossible because the Federal Reserve Bank can just print money to stave off deflation.
If people and corporations are unwilling to borrow or unable to finance debt, and if banks and investors are disinclined to lend, central banks cannot force them to do so. During deflation, they cannot even induce them to do so with a zero interest rate. That’s what has been happening in Japan for over a decade, where rates have fallen effectively to zero but the volume of credit is still contracting. Thus, regardless of assertions to the contrary, the Fed’s purported “control” of borrowing, lending and interest rates ultimately depends upon an accommodating market psychology and cannot be set by decree.
Can the government spend our way out of deflation and depression? The lack of solutions to the deflation problem is due to the fact that the problem results from prior excesses. Like the discomfort of drug addiction withdrawal, the discomfort of credit addiction withdrawal cannot be avoided. The time to talk about avoiding a system-wide deflation was years ago. Now it's too late.
Other respected financial writers and investment managers believe that America will go through deflation next, too.
Our first assumption is that the upcoming depression will be deflationary in nature and should follow the same basic scenario as the three prior complete Kondratieff Waves…. All the elements are in place for the emergence of a fourth period of long-term deflation. [cccxxvi]
As usual, a bear market in US stocks would precede that recession. Given stocks’ lofty levels, the sell-off would probably destroy enough individual wealth to chase consumers out of spending and into a saving spree. Then, as with the case of an Asian-initiated bear market, the end result would be deflation. Damned if you do, damned if you don’t. I see deflation in the cards one way or another. [cccxxvii]
Deflation, despite the negativity felt by so many in the world, does have some benefits. While some businesses may fail, that's simply "part of the territory" in cleaning up the debt and other excesses in a free market economy. Deflation also brings with it lower prices. This will prove most helpful in stocking up before the certain inflation or hyper-inflation to follow.
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It is quite possible we will see a deflationary cycle in America as the consumer credit binge reaches its limits. If allowed to run its course, this deflation can help to restablize our econ
omy. [cccxxix]
Deflation isn’t about to go away. The Fed and the global capital markets will adhere to a goal of no inflation, which in reality translates into strong deflationary pressures in a hypercompetitive high-tech global economy. The trend toward a stable to falling price level is a cause and a consequence of radical economic and technological changes that are creating enormous bounty and dislocation in the American economy. [cccxxx]
The worrying Kondratieff point is that the bigger the debt ratio, the more severe the subsequent deflation needed to wipe out the debt…. Debt deflation will have bred price deflation (i.e. prices will be falling) and we will already be in a depression…. Generally, those countries which liquidate the debt load fastest will emerge quickest and strongest from the depression. [cccxxxi]
Can you recall what inflation feels like? Do you remember the double digit inflation of Carter's Presidency? Well, I know you know that's what we'll be dissecting in this next sub-chapter as relates to the US and many world economies, likely. So, are you ready for Inflation or Hyper-Inflation?
Inflation (or Hyper-Inflation)
As you already understand, inflation or even hyper-inflation will become part of the US economy, in the not too distant future despite all efforts to prevent such. As touched upon earlier, the Feds aggressive printing of US dollars to fund government budgets and other needs can only result in inflation, if not hyper inflation.
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The worst of all economic situations occurs when production falls while prices soar. This cycle, known as an inflationary-recession can rapidly deteriorate into an inflationary-depression in the hands of inept politicians.
Table of Contents
Table of Contents
Introduction
Debt, Debt, and More Debt
Real Estate
Banking
Population and Demographics
Entitlements
Retirement
Political Failings
Cycles
Waves
Reflections
Deflation or Inflation
Conclusions
Weathering the Storm
America's Worst Economic Depression Page 13