Deflation or Inflation? The Debate Continues

What All Major Depressions Have in Common
Signs of deflation are visible but the public will be fooled 
March 23, 2012

By Elliott Wave International

Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt).
-- Conquer the Crash, 2nd edition (p. 88)

Has the United States met that precondition?

Well, consider that total credit market debt as a percent of U.S. gross domestic product was

• 280 percent in 1929 at the start of the Great Depression
• 380 percent in 2008

The current build-up of credit goes far beyond major -- it's unprecedented.

It's been rising steadily for 60 years. The slope literally looks like the side of a steep mountain.

Bank credit and Elliott wave expert Hamilton Bolton studied every major depression in the U.S. In 1957, he made this observation:

All were set off by a deflation of excess credit. This was the one factor in common...the signs were visible many months, and in some cases years, in advance. None was ever quite like the last, so that the public was always fooled thereby.

Let's read again from the second edition of Conquer the Crash (p.92):

A deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people's desire and ability to lend and borrow...

The U.S. has experienced two major deflationary depressions, which lasted from 1835 to 1842 and from 1929 to 1932 respectively. Each one followed a period of substantial credit expansion. Credit expansion schemes have always ended in bust. The credit expansion scheme fostered by worldwide central banking...is the greatest ever...If my outlook is correct, the deflationary crash that lies ahead will be even bigger than the two largest such episodes of the past 200 years.

Is there evidence now that a deflationary trend is underway? Dear reader, the evidence is abundant and growing by the day.

To begin with, just a casual observation of our national economic life reveals a deep general decline in people's desire and ability to lend and borrow.

But there are many specific signs pointing to bankruptcy, default and a deflationary spiral.

Yet they're not grabbing the headlines. The "good" economic reports and levitating stock market are. The public will likely be fooled again. But make no mistake, the signs are there.

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This article was syndicated by Elliott Wave International and was originally published under the headline What All Major Depressions Have in Common. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.