Severe Debt Deflation: Why These 5 Nations Are Most at Risk

“The private sector feels the urge to deflate its debt more acutely than the public sector”

by Bob Stokes
Updated: June 15, 2020

Debt deflation is devastating. It's also rare.

The world experienced a brush with it when the subprime housing market imploded about 12 years ago.

Before that, the last all-out deflation was in the early 1930s -- commonly known as the "Great Depression."

Before delving into the nations most at risk for a severe debt deflation today, let's do away with the common misconception that says deflation is just falling prices.

The actual definition is that deflation is a contraction in the volume of money and credit relative to available goods. Falling prices do occur during deflation, but they are simply an effect.

In other words, as Robert Prechter's 2020 edition of Conquer the Crash, notes:

When the volume of money and credit falls relative to the volume of goods available, the relative value of each unit of money rises, making prices of goods generally fall. Though many people find it difficult to do, the proper way to conceive of these changes is that the value of units of money are rising and falling, not the values of goods.

Deflation requires a precondition: a major societal buildup in the extension of credit and the simultaneous assumption of debt.

Here in 2020, this precondition has been mostly met.

Also keep in mind, it's private-sector debt that we need to focus on most in a debt deflation because the private sector cannot print money to service the debt, as Murray Gunn, EWI's Head of Global Research, recently noted.

With that in mind, our June Global Market Perspective showed this chart and said:

SevereDebt

The private sector feels the urge to deflate its debt more acutely than the public sector, not to mention that lower credit quality in the private sector deflates debt via defaults.

If we strip out government debt and just look at the private sector, the chart shows [that] Hong Kong, the Netherlands, Switzerland, Sweden and Ireland are the five countries most at risk of a severe debt deflation.

Of course, those who live in the countries "least at risk" should also prepare for a severe global debt deflation.

Elliott Wave International's global analysts have a lot more to say about the subject, which includes ideas on how to prepare for deflation.

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