Robert Prechter Dares Mention the ‘D’ Word

Deflation:
How To Survive It
Important warnings about deflation from
Robert Prechter.
June 11, 2010

By Elliott
Wave International

Telegraph.go.uk, May 26: "US money
supply
plunges at 1930s pace… The M3 money supply
in the
U.S. is contracting at an accelerating rate that now
matches
the average decline seen from 1929 to 1933, despite
near zero
interest rates and the biggest fiscal blitz in
history."

Deflation is suddenly in the news again. It's a good
moment
to catch up on a few definitions, as well as strategies
on how
to beat this rare economic condition.

And who better to ask than EWI's president Robert
Prechter?
He predicted the first wave of deflation in the
2007-2009 "credit
crunch" and has written on this topic extensively.

We've put together a great free resource for our Club
EWI members:
a 63-page "Deflation Survival Guide eBook," Prechter’s
most important deflation essays. Enjoy this excerpt —
and for
details on how to read the eBook in full free,
look below.

What Makes Deflation Likely Today?
Bob Prechter, Deflation Survival Guide, free
Club EWI
eBook

Following the Great Depression, the Fed and the U.S.
government
embarked on a program…both of increasing the creation
of new
money and credit and of fostering the confidence of
lenders and
borrowers so as to facilitate the expansion of credit.
These
policies both accommodated and encouraged the
expansionary trend
of the ’Teens and 1920s, which ended in bust, and the
far
larger expansionary trend that began in 1932 and which
has accelerated
over the past half-century. Other governments and
central banks
have followed similar policies. The International
Monetary Fund,
the World Bank and similar institutions, funded mostly
by the
U.S. taxpayer, have extended immense credit around the
globe.

Their policies have supported nearly continuous
worldwide inflation,
particularly over the past thirty years. As a result,
the global
financial system is gorged with non-self-liquidating
credit.
Conventional economists excuse and praise this system
under the
erroneous belief that expanding money and credit
promotes economic
growth, which is terribly false. It appears to do so for
a while,
but in the long run, the swollen mass of debt collapses
of its
own weight, which is deflation, and destroys the
economy. A devastated
economy, moreover, encourages radical politics, which is
even
worse.

The value of credit that has been extended worldwide is
unprecedented.
Worse, most of this debt is the non-self-liquidating
type. Much
of it comprises loans to governments, investment loans
for buying
stock and real estate, and loans for everyday consumer
items
and services, none of which has any production tied to
it. Even
a lot of corporate debt is non-self-liquidating, since
so much
of corporate activity these days is related to finance
rather
than production.

Figure 11-5 is a stunning picture of the credit
expansion of
wave V of the 1920s (beginning the year that Congress
authorized
the Fed), which ended in a bust, and of wave V in the
1980s-1990s,
which is even bigger.

…it has been the biggest credit expansion in history
by a
huge margin. Coextensively, not only is there a threat
of deflation,
but there is also the threat of the biggest deflation in
history
by a huge margin. …