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 his February 11, 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.Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression By Robert R. Prechter, Jr.
The preconditions for deflation have arrived:
(a) Credit issuance to the point of excess has escalated dramatically over the years, beyond anything we’ve ever seen before. Debt levels across the spectrum (from individuals to businesses and corporations to municipalities and governments) are at an all time high:
Source: Institute of International Finance – Global Debt Monitor COVID-19 Lights a Fuse
(b) The issuance of credit to the point of excess has been a major characteristic for many years:
And continues currently:
(c) The Covid-19 pandemic was the trigger that is bringing the excess-of-credit structure down. (See Let’s take a look at the charts. They are worth many, many thousands of words: section below.)
(d) We’ve never seen anything like what is going on currently with the Great Pandemic of 2020 and its global effects on the economy and markets and society:
(e) Current panic is occurring under great government deficits for the majority of countries worldwide:
(f) and (g) A large portion of non-self-liquidating credit (auto loans at $1.3T in the US alone) augments the probability of a deeper deflation:
Let’s take a look at the charts. They are worth many, many thousands of words:
Deflation has arrived. The beginning of The Great Deflation is here.
By Mario Daurte.
Cover photo by Nathan Dumlao on Unsplash.