It's so tempting to become one of the herd calling for more inflation and even -- dare we say it? -- hyperinflation. The problem is that what looks like the easiest call on the planet is likely to be the wrong call. In this excerpt from Bob Prechter's latest issue of The Elliott Wave Theorist, he explains why he still firmly stands on his statement that the world economy is in the early stages of the "greatest deflation ever."
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Inflation vs. Deflation
In recent days, at least six very famous and globally respected financial gurus announced that the dollar has begun a phase of hyperinflation, and many lesser lights have echoed their feelings….
Despite the impressive brain power behind some of these statements, I maintain the opposite opinion: that the world’s financial system is in the early stages of the greatest deflation ever. Just before the March low in the stock market, we were able to call for a respite in the trend, so the calls for inflation that this rally has rekindled appear to us as a normal development. Investors typically fight the last war. Economic bears today are inflationists because they fear a bigger version of the 1970s. Paul Krugman (with whom I disagree on virtually everything) on May 29 quoted an economic historian on the sentiment of the early 1930s, when the inflationary ’teens were likewise burned into people’s memories:
"…during the early years of the Great Depression…many influential people were warning about inflation even as prices plunged. As the British economist Ralph Hawtrey wrote, 'Fantastic fears of inflation were expressed. That was to cry, Fire, Fire in Noah’s Flood.' And he went on, 'It is after depression and unemployment have subsided that inflation becomes dangerous.'"
The latter statement above is exactly what
Conquer the Crash said:
"While I can discern no obvious forces that would counteract deflation, after deflation is another matter. At the bottom, when there is little credit left to destroy, currency inflation, perhaps even hyperinflation, could well come into play."
Consider also that more inflation is the easiest call on the planet. The presumed forces of external causality are clear as can be: We all know that Bernanke is an inflationist. We can see that the Fed and other central banks are offering unlimited credit. We can see that the government is spending money at a record rate. And we know that nothing tangible backs the dollar. But simple logic based on external causes does not work in predicting financial markets.
No one was predicting hyperinflation in 1999 and 2001, when the dollar was topping and the metals bottomed; on the contrary, at that time it was “obvious” that the Fed had the monetary system under control, there was a “New Economy,” and stocks were the only smart investment. At the 2008 all-time highs in commodities, everyone knew the opposite: inflation had been soaring since 2001, the dollar was crashing, and it was “obvious” that the Fed was engineering a powerful inflation. That was right before commodities fell more in eight months than at any time in modern history. Many of the hyperinflationists quoted above are career contrarians, as I try to be; but a forecaster should be quite concerned about the true extent of his contrariness if the evidence for his being correct were cycling right along with that for the average (bullish) economist, which is exactly the position of today’s believers in hyperinflation: Every time the markets rally, the opinions of both groups feel right.