Inflation vs. deflation
To compare and contrast inflation vs. deflation,
we must first define deflation
and inflation. Now that you know the definition
of each, let's address the argument of inflation vs.
deflation in today's environment.
Many of the people who answered "yes" to the can
the Fed stop deflation question are the same ones
who warn of imminent inflation due to the Fed's inflation
policies.
These inflationists will likely be right one day,
but not until every ounce of hot air is finally gone
from the largest deflating debt bubble in history.
Steve Hochberg, analyst and co-editor of The Elliott
Wave Financial Forecast, wrote in 2006, "We must be
close to the start [of deflation], because the latest
monthly tally of inflation vs. deflation mentions
in five major daily papers shows that there were 165
references to inflation in May [2006] and zero mentions
of deflation." He explains that such a one-sided inflation
vs. deflation bias is exactly what contrarian analysts
look for when forecasting a trend change.
Inflation vs. deflation are polar opposites. However,
each relies on mass psychology to foster its effects.
The psychology driving today's historic credit inflation
has reached a terminal state, as indicated first
by inflation, then by deflation. We've seen years
of record indebtedness followed by collapsing housing
prices, multi-billion-dollar write-downs and finally,
by the economic slowdowns in the U.S. and Europe.
All this shows that deflation is easily winning the
inflation vs. deflation battle. Despite these signs,
there is almost no recognition that deflation is already
happening.
As the saying goes, it's the market's job to fool
as many people as possible, and it's doing so once
again. Most people weighing inflation vs. deflation
are still focused on the wrong enemy. The mistaken
focus on inflation in the face of obvious signs of
deflation is due to the human tendency to project
the future linearly, not cyclically.
For more on deflation, Download Robert Prechter's FREE 60-page eBook, The Guide to Understanding Deflation.
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