A deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people’s desire and ability to lend and borrow. A depression is characterized in part by a persistent, sustained, deep, general decline in production. Since a decline in production reduces debtors’ means to repay and service debt, a depression supports deflation. Since a decline in credit reduces new investment in economic activity, deflation supports depression. Because both credit and production support prices for investment assets, their prices fall in a deflationary depression. As asset prices fall, people lose wealth, which reduces their ability to offer credit, service debt and support production. This mix of forces is self-reinforcing.

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 (see Chapter 10) is the greatest ever. The bust, however long it takes, will be commensurate. 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.

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Free Download: Find Out Why Deflation Should Be On Your Radar The text on this page is excerpted from Chapter 9 from Bob Prechter's Best Seller Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression. Join Club EWI, our free online community, and instantly download Chapter 11 of the book, called What Makes Deflation Likely Today. Bob explains how we have arrived at this deflationary period and how sever it's likely to be. The download will also include the text from the chapter you are reading on these pages. Club EWI members also have access to updated articles and tutorials. Join Club EWI now! (Privacy Policy) Already a Club EWI Member? Download the free chapter here. Forgotten your Club EWI User ID and password?