Monday, October 31, 2005


No Alternatives To Deflation: Prechter

The Elliott Wave crew review a year old interview with Robert Prechter. "Let's look back one year in time to Bob Prechter's Theorist of October 2004. In it, he published an interesting interview he did with Chris Oliver, of The South China Post."

"Q: Can the Federal Reserve prevent deflation? Bob Prechter: No. We have a huge bond market of $30 trillion, which is debt already created. If bond investors came to believe that the Fed would begin printing money and throwing it around, what would they do? They would sell every bond they’ve got, which would lead to a decrease in the supply of credit because bond prices would fall and interest rates would rise. So there aren’t any alternatives to deflation."

"Q: What will be the outcome of deflation? Bob Prechter: The ultimate result is going to be a worldwide depression. There were deep depressions in the 1790s, the 1840s and the 1930s, and I think the next one is already under way. It started in 2001."

"Q: But doesn’t the gold rally predict inflation? Bob Prechter: Think about this: Gold is trading exactly where it was in 1996 despite massive credit inflation over the past eight years. Why is that? I think the gold market understands the difference between credit inflation and currency inflation. A reversal in credit expansion, which is inevitable, will crush prices for everything, and the gold market knows it. The gold bugs’ theory is that an increasing money, actually credit, supply should be bullish for gold and silver. But it hasn’t been bullish for 24 years, so why is it bullish now?..People have a psychological imperative to come up with reasons to be bullish at tops and bearish at bottoms."

"Q: If the forces of inflation in real estate and consumer prices have been going on for decades, why should we believe they are now about to reverse? Bob Prechter: The bull market of the 1990s was a period of high confidence. Many people were willing to extend credit, and many others were willing to borrow. As soon as the trend turned down, it told you that people were becoming more defensive, more protective of what they have, more conservative financially. In the long run, it means a trend towards less extension of credit and less assumption of debt. It will eventually mean the net retirement of debt."

Of course deflation is inevitable. I have thought for a long time it would be skipping onto the world stage by now, and history clearly shows that credit booms always bust and all periods of monetary inflating fizzle. So, Prechter is right about that. BUT....the threat of it would send Bernanke to the inflating machine and the money flood would shift into overdrive. I don't see any evidence of fear among citizens of a severe shortage of money. Starbucks is still doing booming business and the bars and restaurants are filled almost every night.
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