Inflation or deflation? Eventually it’s the former no matter what

inflation vs deflation

inflation vs deflation

For people who so-called predicted this downturn (probably predicted it 1 year ago), they certainly are missing the real threat. No it’s no inflation, it’s deflation. Ever wonder why the US dollar is increasing in value while everything else crashes in price? (housing, oil, and all other commodities?). It’s called deflation, and something much worse than inflation. Cash is king and everyone is trying to get some, that is why the dollar is going up in value. Inflation will come, but only after deflation runs it’s course. The people who so-called predicted this in bay-street are just the band-wagon group, that predicted it after it already had started.

Will deflation hit before significant inflation?

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It is true that wages will fall, but not across the board. Wages will fall in the areas that have too many people looking for jobs, in this case I suspect that most of that 16% are people who were working factory jobs, and the factory closed. Waterloo Region here in Ontario has around 10% unemployment from factory closures, but thousands of high-tech job openings. The skills don’t match, so factories in the area may be able to reduce wages (if their unions will let them), but the technology sector is constantly increasing wages to try to keep employees from going to Seattle or Silicon Valley. If the net change turns out to be positive or negative will depend on the area, and how far wages fall for the jobs that have a glut of eligible workers now available.

The following article is an excerpt from Elliott Wave International’s free report, 20 Questions With Deflationist Robert Prechter. It has been adapted from Prechter’s June 19 appearance on Jim Puplava’s Financial Sense Newshour. To read the entire conversation, access the 20-page report here.

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Jim Puplava: Bob, I want to pick up from last September. Since then we’ve had several quarters of positive economic growth. Asset classes rose substantially, CPI turned positive, gold has hit a new record, oil is close to $80 a barrel. I guess a lot of our listeners would like to know, have these events altered your views on deflation?

Robert Prechter: No, because we forecasted these events, and we forecasted them at the bottom in March and April of 2009. On February 23 in the Elliott Wave Theorist, I said that we were almost at the bottom; that ideally the S&P should get down in the 600s before turning up; and that the Dow was going to rally from that low up to about 10,000. We put that target out a few days after the low. The main thing we said at the time was that it was going to be only a partial retracement, in other words a bear market rally. By the end of it, we said people would be bullish on the economy, there would be positive economic numbers, investors would think we have made the turn, the Fed would take credit for having saved the financial system, and there would be optimism across the board. All of this has happened. And going into April 2010, few people in the fundamentalist or technical camp were looking for a downturn.

The final thing I said was that Obama’s popularity would rise into that peak, and on that one I was wrong. His ratings couldn’t even bounce during that period, which I found very surprising. But both Obama and George Bush’s popularity trends followed the real value of stocks, not the inflated dollar price of the stock market, which I find interesting.

As far as inflation and deflation go, we had deflation during the down cycle in 2008. Commodities fell hard, the stock market fell hard and real estate fell hard. But the recovery that we were looking for in the first quarter of 2009 was expected to be a reflationary, and it was. You saw a decline in credit spreads. You saw a rise from the lows in commodity prices and stock prices. All of that is perfectly normal. These are just waves ebbing and flowing. But the long-term trend is still down, and as this cycle matures we are going to see more and more evidence of deflation.

Editor’s Note: The article you are reading is just one small excerpt from Elliott Wave International’s FREE report, 20 Questions With Deflationist Robert Prechter. The full 20-page report includes even more of Prechter’s insightful analysis on fiat currency, gold, the Fed, the Great Depression, financial bubbles, and government intervention. You’ll learn how to protect your money — and even profit — in today’s environment. Read ALL of Prechter’s candid answers for FREE now. Access the free 20-page report here.

3 thoughts on “Inflation or deflation? Eventually it’s the former no matter what”

  1. Inflation will happen, Deflation will prevent the gov’t from paying its debts, and will be forced to print money to pay its bills and interest due.

    Deflation will accelerate hyper-inflation as it will force the gov’t to devalue the currency faster. Even if the gov’t choose to hard default on its debts we will still have hyper-inflation as the dollar would become worthless overnight, as it did when the soviet union collapsed, unable to pay its debts.

    Deflation = fast road to hyper-inflation
    Stagnation = slow road to hyper-inflation.
    Inflation = slowest road to hyper-inflation.

    FWIW: gov’t is broke this year. for FY 2010, Federal gov’t will only collect 1.987 Trillion, and pay 2.13 Trillion in entitlements and interest payments. The Federal gov’t is borrowing to keep its doors open. Sooner or later the world will figure it out and the value of the dollar will collapse. For the next six to twelve months, the world will be focus on Asian growth (now slipping) and European sovergn debt crisis. Sovergn debt crisises always start at the smaller players and work up the to biggest nations.

  2. Techguy,

    That is a very interesting thing about deflation being the fastest road to hyper inflation. It will be interesting to see what will be happening in the near future with the bush tax cuts in 2001 that are coming due to expire as well.

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