{"id":7183,"date":"2010-03-01T09:48:37","date_gmt":"2010-03-01T14:48:37","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=7183"},"modified":"2010-03-01T09:48:37","modified_gmt":"2010-03-01T14:48:37","slug":"surviving-deflation-first-understand-it","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2010\/03\/01\/surviving-deflation-first-understand-it\/","title":{"rendered":"Surviving Deflation: First, Understand It"},"content":{"rendered":"

Deflation is more than just “falling prices.” Robert Prechter explains why.<\/span><\/h3>\n

By Editorial Staff<\/span><\/h3>\n

The following article is an excerpt from Elliott Wave International’s free Club EWI resource, “The Guide to Understanding Deflation. Robert Prechter’s Most Important Writings on Deflation<\/a><\/span><\/strong>.”<\/p>\n

The Primary Precondition of Deflation<\/strong>
\nDeflation requires a precondition: a major societal buildup in the extension of credit. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, 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.”<\/p>\n

“The Fed Will Stop Deflation”<\/strong>
\nI am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let\u2019s try one.<\/p>\n

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone\u2019s delight, it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy. Sales again slow, so it lowers the price to $900 each. People return to the stores to buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn. Finally, the country is awash in Jaguars. Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory — ironically now made fact — the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving, the economy will stop. So the government begins giving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don\u2019t care if they\u2019re free. They can\u2019t find a use for them. Production of Jaguars ceases. It takes years to work through the overhanging supply of Jaguars. Tax collections collapse, the factories close, and unemployment soars. The economy is wrecked. People can\u2019t afford to buy gasoline, so many of the Jaguars rust away to worthlessness. The number of Jaguars — at best — returns to the level it was before the program began.<\/p>\n

The same thing can happen with credit.<\/p>\n

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit-production plants all over the country, called Federal Reserve Banks. To everyone\u2019s delight, these banks offer the credit for sale at below market rates. People flock to the banks and buy. Later, sales slow down, so the banks cut the price again. More people rush in and buy. Sales again slow, so they lower the price to one percent. People return to the banks to buy even more credit. Why not? Look how cheap it is! Borrowers use credit to buy houses, boats and an extra Jaguar to park out on the lawn. Finally, the country is awash in credit. Alas, sales slow again, and the banks panic. They must move more credit, or, according to its theory — ironically now made fact — the economy will recede. People are working three days a week just to pay the interest on their debt to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the banks begin giving credit away, at zero percent interest. A few more loans move through the tellers\u2019 windows, but then it ends. Nobody wants any more credit. They don\u2019t care if it\u2019s free. They can\u2019t find a use for it. Production of credit ceases. It takes years to work through the overhanging supply of credit. Interest payments collapse, banks close, and unemployment soars. The economy is wrecked. People can\u2019t afford to pay interest on their debts, so many bonds deteriorate to worthlessness. The value of credit — at best — returns to the level it was before the program began.<\/p>\n

Jaguars, anyone?<\/p>\n

Read the rest of this important 63-page deflation study now, free<\/a>!<\/strong><\/span> Here’s what you’ll learn:What Triggers the Change to Deflation
\nWhy Deflationary Crashes and Depressions Go Together
\nFinancial Values Can Disappear
\nDeflation is a Global Story
\nWhat Makes Deflation Likely Today?
\nHow Big a Deflation?
\nMore<\/p>\n<\/div>\n
Elliott Wave International (EWI) is the world\u2019s largest market forecasting firm. EWI\u2019s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI\u2019s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet\u2019s richest free content programs, Club EWI.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Deflation requires a precondition: a major societal buildup in the extension of credit. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-7183","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/7183","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=7183"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/7183\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=7183"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=7183"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=7183"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}