Consider two recent headlines (bold added):
WASHINGTON -- U.S. annual inflation vanished for the first time in over half a century, a government report showed, as the severe recession and sharp decline in energy prices since last summer led to a rapid reversal in price pressures. (WSJ.com, February 21, 2009)
"'It's a deflationary spiral,' said Dan Greenhaus, an analyst in the equity strategy division of Miller Tabak & Company. 'Prices go down, people hold back, prices go down further, people hold back, and so on and so forth.'" (International Herald Tribune, February 24, 2009)
Now, please consider this excerpt from the November 2005 Elliott Wave Theorist by EWI's founder and president Robert Prechter (bold added):
The Coming Change at the Fed
The consensus appears to be that the long-term expansion in the credit supply will continue or even intensify under the Fed chairmanship of Ben Bernanke. One reason many people share this belief is their recollection of Bernanke's November 2002 speech, “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” in which he likens the Fed’s printing press option to dropping money from helicopters. There are reasons to believe, however, that the outcome will not be as the majority expects.
One reason that Bernanke is likely to preside over a deflation in credit is that everyone believes the opposite. Investors have poured money into commodities, precious metals, stocks and property in the belief that if anything is certain, it is death, taxes and inflation. When the majority of investors thinks one way, it is likely to be wrong. This is basic market analysis. We truly need not provide any other answer, but we can.
A more complex answer begins with the understanding that analysts constantly confuse credit creation with money creation. …credit is not money. Economists speak of “the money supply” as if they were referring to money, but they are not; for the most part, they are referring to credit. When credit expands beyond an economy’s ability to pay the interest and principal, the trend toward expansion reverses, and the amount of outstanding credit contracts as debtors pay off their loans or default. The resulting drop in the credit supply is deflation.
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Clearly, Bernanke is a firm believer in the idea that the economy is a machine, whose carburetor simply needs fine-tuning to get it to run smoothly. Like most economists, Bernanke doesn’t accept the idea of the causal power of waves of social mood. Economists, deep believers in the potency of social directors, are convinced that “monetary policy…moves the entire economy.” [But] society, the economy, the credit supply and the stock market do not behave in such a manner. When you think you have them under your thumb, they have you.
That’s enough theory. Let’s look at some history. Public figureheads have a way of representing eras. This is certainly true of entertainment icons and politicians. The history of Fed chairmanship implies a similar tendency for changes of the guard to coincide with changes in social mood and therefore stock prices and the economy. Figure 1 depicts our social-mood meter—the DJIA—since the Fed’s creation in 1913, marked with the reigning chairmen according to a list on the Fed’s website.
The first chairman, Hamlin, presided over a straight-up boom. … Greenspan has presided over the manic ’90s and the topping process. The next chairman will have his own era. Given the eras that have immediately preceded the coming change in leadership, the odds are that this new environment will be a bear market.
Like the entrenched belief in continued inflation, there is a widespread expectation of smooth sailing under Bernanke. With virtually everyone prepared for either good times or severe inflation, bad times and deflation will catch them all off guard.
It seemed fitting to publish this 2005 quote from Prechter on the day when Ben Bernanke told the U.S. Senate Banking Committee that the Federal Reserve is “committed to using all available tools” to stop the crisis. The same day when a report showed that U.S. home prices "sank to their lowest levels since the third quarter of 2003"…
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