The most important thing to remember about the inflation vs. deflation debate is that this financial crisis is about the expansion and contraction of credit.
As we all know, "we've a debt laden economy," and when people are on the verge of defaulting on their loans, they will sell everything to stay afloat and maintain their standard of living. If they don't, then their creditors will.
But during deflation practically no one buys so debtors remain on the margin of survival or default.
To add insult to injury, due to the contraction of credit, these debtors can not get any more credit and the vicious cycle continues. So as of late, it is not just debtors that are on the edge. Creditors are on the edge because the debtors can not pay their debts; corporations are on the edge because their sales have collapsed and they can not pay their debts nor get lines of credit extended; and now governments are on the edge because this is a SYSTEM-WIDE collapse and there is nothing they can do about it.
So what we have had and are going through at the moment is a contraction of credit, which is an effect of deflation.
Headlines and economist are saying that we've hit bottom and the worst is over. Contrarians say 'don't believe it.'
Inflation or Deflation? Which will win?
From an Elliott Wave Principle perspective, deflation will win and the worst is not over yet. The U.S. economy is starting on its second dive into a deflationary spiral, towards what could be labeled as a new great (global) depression.
When we imagine the cycle of credit contraction just described continuing at an accelerated rate, on a wider scale, and penetrating deeper into our daily lives, at work and home, then it is easy to see Robert Prechter's forecasts, in his October 2003 Elliott Wave Theorist newsletter, coming true:
- The total amount of credit outstanding worldwide will decline substantially.
- Consumer confidence will fall to record low levels.
- The trend toward economic contraction that began in 2001 will continue to develop into a depression.
- Real estate values will fall more than they did in the 1930s and 1940s.
- More banks will fail than failed in the 1930s.
- The unemployment rate in the U.S. and in most countries around the world will rise and eventually exceed 25 percent.
- Affordable housing will become difficult to come by. Family members will move in with each other. Homelessness will increase.
- Stock markets around the world will continue to fall. Ultimately, the averages will drop more than 90 percent.
- Debt packages made of mortgage-backed bonds, auto loans and credit card debt will become viewed as unworthy investments.
- Many, if not most, pension plans will fall in value and be unable to provide the promised benefits. Anger over this development will result in demonstrations, violence and tardy and ineffective political reform.
- The Federal Reserve System will be discredited and then abolished.
Understanding is your first step. If you haven't yet given Prechter's deflation argument your full attention, you should know now that yesterday was the best time to do so. Steadfastly throughout the years, financial analyst Robert Prechter issued warning after warning about the coming deflation. The experts said he was wrong. The markets proved otherwise.
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