Articles

A LITTLE DEFLATION WOULDN’T HURT
by Tim Tursick
September 5, 2007

I’m no monetary scientist nor a financial wizard yet. Information on the economy, inflation and deflation have flooded all communication avenues as never before possible. So, I read, I listen, I watch. I’m an average fifty year old American concerned about all the personal financial questions of the day: Have I saved enough for retirement? Is the Fed going to make my dollars worthless by the time I finally quit working? Should I buy gold and silver to preserve what wealth I have managed to acquire? Will there be another bubble to invest in that will assure my comfortable retirement?. . . yada, yada, yada.

I daily appreciate the blessings I do have because I know without any doubt that I am substantially better off than the silent, laboring majority. But I also fear because I am not a millionaire. It has been said by many that in order to retire at the same comfort level that my parents worked hard to achieve in their golden years, I will need at least one million dollars when I reach my time to retire. This is one small item usually heard from those who are certain the central bankers will have the desire and ability to control a relatively slow devaluation and ultimate demise of the dollar over time, say the next fifteen years or there-abouts. Good for exports they say. Many are calling for a much faster decline and death with a new currency to be born, taking the place of the green back. I have at times been in total agreement with the inflation/currency devaluation group.

by Michael Nystrom, MBA
Originally published April 25, 2005
Revised & Reposted - August 15, 2007

Introduction
The first chapter of Jeremy Rifkin's book The Hydrogen Economy is titled, "Between Realities." He begins:

Throughout history, human beings have occasionally found themselves caught between two very different ways of perceiving reality. . . Today we live in similar times of great tumult, of failing orthodoxies and radical new possibilities. After two centuries of industrial production and commerce, the use of mass human labor yoked to fossil-fuel-powered machines in factories, offices, and commercial businesses is slowly falling by the wayside. . . within a matter of a few decades, the cheapest workers in the world will not be as cheap as the intelligent technologies that will replace them, from the factory floor to the front office.

August 10, 2007
[Editor's note: As more writers have recently begun to discuss the possibility of deflation, it called to mind Chapter 9 of Conquer the Crash - When Does Deflation Occur? part of which is excerpted below.]

Excerpted from:
Conquer the Crash, pp.88-95
Robert Prechter
Reprinted with permission

Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt). Austrian economists Ludwig von Mises and Friedrich Hayek warned of the consequences of credit expansion, as have a handful of other economists, who today are mostly ignored. 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.

(b) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.

(c) Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.

(d) None was ever quite like the last, so that the public was always fooled thereby.

(e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.

(f) Credit is credit, whether non-self-liquidating or self-liquidating.

(g) Deflation of non-self-liquidating credit usually produces the greater slumps.

by Michael Nystrom
August 3, 2007

Editor's Note: The following is in answer to a reader's question "What do they mean when they talk about global liquidity drying up?"

In remembrance of my high school biology teacher, who always reminded us that the only stupid question is an unasked question, I offer the following explanation.

Financial analysts and news reporters often refer to the concept of "liquidity," as though it were a magic wand. One touch and all ills are cured. Until recently, it was often heard that "the world is awash in liquidity," which was considered a good thing. More recently, the en vogue observation is that "global liquidity is drying up," which is spoken in ominous tones.

Liquidity and You
What is liquidity? Liquidity is simply a measure of how quickly an asset can be converted into cash. Ultimately, liquidity is cash, because cash can immediately be exchanged for just about anything else.

July 27, 2007
[Editor's note: with Thursday's big market decline, it called to mind the May issue of Robert Prechter's Elliott Wave Theorist, part of which is excerpted below. Prechter was months early in discussing many of the issues that the market is just waking up to.]

Excerpted from:
The Elliott Wave Theorist, May 2007 Issue

Robert Prechter
April 30, 2007
Reprinted with permission

I am not just bearish. It goes much further than that. The pyramid of debt, the extremity of optimism and the b‑wave label of the advance since 2002 all portend an all‑out collapse of investment prices in wave c. The decline in social mood during that wave will engender a crushing deflation in the galaxy‑sized bubble of outstanding credit and ultimately a disastrous depression. Few of us will be able to side‑step the effects of the depression, but we can all avoid the effects of falling financial prices and the deflation of the debt bubble by following the recommendations in Conquer the Crash.

Investors Are Buying More with IOUs Than Money
When I wrote Conquer the Crash, outstanding dollar‑denominated debt was $30 trillion. Just five years later it is $43 trillion, and most of the increase has gone into housing, financial investments and buying goods from abroad. This is a meticulously constructed Biltmore House of cards, and one wonders whether it can stand the addition of a single deuce. Its size and grandeur are no argument against the ultimate outcome; they are an argument for it.