Deflation Inflation

To answer the question of whether we will have inflation or deflation in the upcoming years, we need to have an understanding of what these terms mean, and also what money is.

Money today is debt. Or, debt is money. The expansion of money in our economy is not by the increase of productivity, it is by the increase of debt. The expansion of money/debt has been increasing exponentially because of the application of the banks use of the fractional reserve 9:1 ratio. If you are not familiar with these ideas, we highly recommend you watch Paul Grignon's 47 minute animated presentation, 'Money as Debt', on YouTube.

One very simple way to explain the credit crunch would be to consider that the amount of interest payable on the debt owed became a figure higher than the population could earn. Hence defaults and the beginning of the sub-prime crisis and the toxic assets held by the banks. Why are they termed toxic? Because the original people who were debtors to the loans cannot pay them.

This explanation fits nicely with the Elliott Wave Principle. The last stages of the inflating debt bubble were driven by group psychology. Debt became easier to obtain- buy that house, stocks, TV now, no down payment, interest free for 18 months, being offered to practically everyone.

The expansion of money/debt is inflationary. As the amount of money circulating in a system increases, the perceived value of each note decreases. Just as if you were to add water to an alcoholic drink, it becomes less concentrated with alcohol, there is less value in money when it is diluted. So it takes more of it to buy the same stuff.

The opposite of this situation is what we have begun to see, and will see in a more extreme fashion in coming years. Fear has set in at the top of an inflationary cycle and more people will continue to default on their debts. Therefore, the willingness of banks to extend credit reduces. And because money is debt, with reducing credit we reduce the money supply. When there is less money being supplied we have deflation, which is the reducing value of stuff (very simply put).

Further examples of deflation: the stock market, from a high of 14,157 on October 2007, the DJIA fell to a low of 6,715 in March 2009; property markets around the world have plunged; oil has fallen from a high of $137.11 per barrel in July 2008, to a low of $34.57 in January 2009. Many consumer goods have become cheaper and the CPI of many countries is showing negative figures for the first time since the Great Depression.

Since these lows many markets have risen, but this is a bear market rally. Deflation will return because the underlying fear and pessimism is still there.

Because most of us have not experienced deflation in our lifetimes, we need to be prepared. If you are wondering how to protect your family and your wealth from deflation, you would be well advised to read Robert Prechter's Conquer the Crash, where he outlines very clearly what deflation is, how it affects you, and what you can do to not only avoid its negative consequences but also to prosper.

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