Complacency Feeds Deflation

From The Elliott Wave Financial Forecast:

You don't have to look hard for renewed optimism these days.
For instance: The World Economic Forum in Davos, Switzerland – it's a conspicuous indicator of popular sentiment today. Bloomberg reports, "Eighty-one percent of 1,198 chief executive officers in 52 nations expressed confidence in the next 12 months, the most since 2008 and up from 64 percent last year."
It reminds us of the sentiment in early 2007, about nine months before the biggest stock market peak in more than a century. Here's what The Elliott Wave Financial Forecast wrote about that year's summit participants:
"Bankers, investors, and executives last week arrived at the Swiss resort of Davos giddy about record profits and bonuses. After five days of hectoring by policy makers that they are too complacent, they left just as happy." – Feb. 2007
We don't have to remind you want happened in late 2007 – and what unfolded the year after.


We would like to remind our readers that Hope is not a strategy.

If central bankers would increase the overnight rate to 3%, thereby running neutral to slightly restrictive monetary policy, deflation would be allowed to work its magic by eliminating bad debts and malinvestments and the economy would begin to recover.  Then these CEOs could have reason to have increased confidence.  Truly, the high level of CEO confidence is a contrary indicator of economic health in today's environment.

Instead, the Fed insists on near zero rates for as long as possible in a vain attempt "boost" the economy. 

Here is an example of how deflation can work from Elliott Wave International:

The Primary Precondition of Deflation

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 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."

"The Fed Will Stop Deflation"
I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let’s try one.

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’s 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’t care if they’re free. They can’t 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’t 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.

The same thing can happen with credit.


  1. You know, i really knew this "economy" was fk'ed back in the mid-80's...i distinctly remember a 'throw-away' comment by A. Greenspan, when asked by a 'reporter', what he intended to do about the Social Security 'problem' (at the time)...The 'reply' was: "There is NO 'problem'...WE will JUST 'inflate it away'...and THAT has been 'the policy' all along (Kinda insane, don'cha think?)

  2. I share your sentiments Dave. In my view the root of the problem goes much deeper than anyone in the media has acknowledged to date. The way of thinking that fostered these problems is still entrenched today.
    We will attempt to examine the deeper roots of our current problems in a future post.


Post a Comment