How to Protect Yourself and Your Family From Deflation

Read this this free special report about the unexpected but grave risk to your portfolio.

Prepare For This Growing Threat

The very real threat of deflation is hiding in plain sight. In this free report, you'll learn:

The Primary Precondition of Deflation

What Causes the Change to Deflation

What Happens to Your Finances During Deflation

Why is Deflation Likely Today?

The sooner you see the danger for what is, the better you'll be able to prepare and the safer you'll be from its devastating effects.

Get instant access to this free resource now:

Already a member of EWI?

If so, then you're all set. Thank you for being a member of our community! Here's how to access:

How to protect yourself and your family from deflation

Don't have an EWI Login?

No worries! Simply join Club EWI, our free Elliott wave educational community, and gain access to this resource plus a full catalog of other valuable lessons. Plus, we'll keep you updated with new resources, exclusive invitations, and deals. Sign up now and get FREE access to:

How to protect yourself and your family from deflation

We respect your privacy.

How to Protect Yourself and Your Family From Deflation

What You Need to Know Now

The media has been talking about deflation. The word is finding itself inserted into articles of many kinds. And with good reason: Deflation is a concern with any financial contraction, including the one we've been witnessing recently -- especially when there are record levels of debt in the system as there are now.

It's crucial to understand what deflation truly is and is not. In fact, most people think that deflation equals falling prices. Deflation INCLUDES falling prices. But that's not its most important feature. Its most important feature is that the supply of money and credit disappears. Because of that, most people are devastated, financially, when it occurs.

The good news is that you can prepare for deflation. If you do so, you can actually turn its most devastating impacts on their heads -- so they HELP you rather than HURT you.

To begin our report, let's return to our definition: Deflation is the contraction in the supply of money and credit. This occurs because businesses and people become less aggressive financially. Banks stop lending money and businesses and people stop borrowing. All parties cut their spending. They hold onto whatever cash they have. Perhaps you've already seen aspects of this in your current situation.

How can you protect yourself from deflation's effects, and turn those effects into positives? To answer those questions, let's begin with some key excerpts from the most popular book on the topic ever published, Robert Prechter's Conquer The Crash 2020: You Can Survive and Prosper in a Deflationary Depression. The book is considered THE seminal work on the topic and has sold hundreds of thousands of copies since its first edition was released in 2002. It is a New York Times and Wall Street Journal best-seller.

Here are your excerpts from Conquer the Crash.


The Primary Precondition of Deflation

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

Economists Ludwig von Mises and Friedrich Hayek warned of the consequences of credit expansion, as have a handful of other economists. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter to Charles Collins, summarized the causal train this way:

"In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:

  • All were set off by a deflation of excess credit. This was the one factor in common.
  • Sometimes the excess-of-credit situation seemed to last years before the bubble broke.
  • Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.
  • None was ever quite like the last, so that the public was always fooled thereby.
  • Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.
  • Credit is credit, whether non-self-liquidating or self-liquidating.
  • Deflation of non-self-liquidating credit usually produces the greater slumps."

Self-liquidating credit is a loan that is paid back, with interest, in a moderately short time, from production. The production facilitated by the loan -- for a business start-up or expansion, for example -- generates the financial return that makes repayment possible. The full transaction adds value to the economy.

Non-self-liquidating credit is a loan that is not tied to production. When financial institutions lend money to consumers for purchases of big cars, yachts or luxury homes, or for speculations such as the purchases of stock certificates, no production effort is tied to the loan. Contrary to nearly ubiquitous belief, such lending adds costs to the economy, not value. If someone needs a cheap car to get to work, then a loan to buy it adds value; if someone wants an SUV to consume, then a loan to buy it does not add value. Advocates claim that such loans "stimulate production," but they ignore the cost of the required debt service, which burdens production.

Near the end of a major expansion, few creditors expect lots of default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change for the negative, which is why they borrow freely.

Deflation involves a substantial amount of bad debts because almost no one expects deflation before it starts. Surprise is a prerequisite of deflation.


What Triggers the Change to Deflation

A trend of credit expansion has two components: the general willingness to lend and borrow and the general ability of borrowers to pay interest and principal. These components depend respectively upon (1) the trend of people's confidence, i.e., whether both creditors and debtors think that debtors will be able to pay, and (2) the trend of production, which makes it either easier or harder in actuality for debtors to pay. So, as long as confidence and production increase, the supply of credit tends to expand. The expansion of credit ends when the desire and the ability to sustain the trend can no longer be maintained. As confidence and production decrease, the supply of credit contracts.

The psychological aspect of deflation and depression cannot be overstated. When the trend of social mood changes from optimism to pessimism, creditors, debtors, investors, producers and consumers all change their primary orientation from expansion to conservation. As creditors become more conservative, they slow their lending. As debtors and potential debtors become more conservative, they borrow less or not at all. As investors become more conservative, they commit less money to debt investments. As producers become more conservative, they reduce expansion plans. As consumers become more conservative, they save more and spend less. These behaviors reduce the "velocity" of money, i.e., the speed with which it circulates to make purchases, thus putting downside pressure on prices. The psychological change reverses the former trend.

The structural aspect of deflation and depression is also a factor. The ability of the financial system to sustain increasing levels of credit rests upon a vibrant economy. At some point, a rising debt level requires so much energy to sustain -- in terms of meeting interest payments, monitoring credit ratings, chasing delinquent borrowers and writing off bad loans -- that it slows overall economic performance. A high‑debt situation becomes unsustainable when the rate of economic growth falls beneath the prevailing rate of interest on money owed and creditors refuse to underwrite the interest payments with more credit.

When the burden becomes too great for the economy to support and the trend reverses, reductions in lending, borrowing, investing, producing and spending cause debtors to earn less money with which to pay off their debts, so defaults rise. Default and fear of default prompt creditors to reduce lending further. The resulting cascade of debt liquidation is a deflationary crash. Debts are retired by paying them off, "restructuring" or default. In the first case, no value is lost; in the second, some value; in the third, all value. In desperately trying to raise cash to pay off loans, borrowers bring all kinds of assets to market, including stocks, bonds, commodities and real estate, causing their prices to plummet. The process ends only after the supply of credit falls to a level at which it is collateralized acceptably to the surviving creditors.


Financial Values Can Disappear

People seem to take for granted that financial values can be created endlessly seemingly out of nowhere and pile up to the moon. Turn the direction around and mention that financial values can disappear into nowhere, and they insist that it is not possible. "The money has to go somewhere.... It just moves from stocks to bonds to money funds.... It never goes away.... For every buyer, there is a seller, so the money just changes hands." That is true of the money, just as it was all the way up, but it's not true of the values, which changed all the way up and can change all the way down.

Asset prices rise not because of "buying" per se, because for every buyer, there is a seller. They rise because those transacting simply agree that their prices should be higher. All that everyone else -- including those who own some of that asset and those who do not -- need do is nothing. Conversely, for prices of assets to fall, it takes only one seller and one buyer to agree that the former value of an asset was too high. If no other active bids or asks are competing with that buyer and seller's price, then the value of the asset falls, and it falls for everyone who owns it. If a million other people own it, then their net worth goes down even though they did nothing. Two investors made it happen by transacting, and the rest of the investors and all non‑investors made it happen by choosing not to disagree with their price. Financial values can disappear through a decrease in prices for any type of investment asset, including bonds, stocks, commodities, properties and cryptocurrencies.

Anyone who watches the stock or commodity markets closely has seen this phenomenon on a small scale many times. Whenever a market "gaps" up or down on an opening, it simply registers a new value on the first trade, which can be conducted by a small portion of market participants. It did not take everyone's action to make it happen, just most people's inaction on the other side. In financial market "explosions" and panics, there are prices at which assets do not trade at all as they go from one trade to the next in great leaps.

A similar dynamic holds in the creation and destruction of credit. Let's suppose that a lender starts with a million dollars and the borrower starts with zero. After the creditor lends his money, the borrower possesses the million dollars, yet the lender feels that he still owns a million‑dollar asset. If anyone asks the lender what he is worth, he says, "a million dollars," and shows the note to prove it. Because of this conviction, there is, in the minds of the debtor and the creditor combined, two million dollars worth of value where before there was only one. When the lender calls in the debt and the borrower pays it, the lender gets back his million dollars. If the borrower can't pay it, the value of the note goes to zero. Either way, the presumed extra value disappears. If the original lender sold his note for cash, then someone else loses. In an actively traded bond market, the result of a looming default is like a game of "hot potato": whoever holds it last loses his entire investment. When the volume of credit is large, investors can perceive vast sums of money and value where in fact there are nothing but repayment promises, which are financial assets dependent upon consensus valuation and the ability of debtors to pay. IOUs can be issued indefinitely, but they have value only as long as, and only to the extent that, people believe the debtors will repay.

The dynamics of value expansion and contraction explain why a bear market can bankrupt millions of people. At the peak of a credit expansion and bull market, assets have been valued upward, and all participants are wealthy. This is true of both the people who sold the assets and the people who hold the assets. The latter group is far larger than the former, because the total supply of money has been relatively stable while the total value of financial assets has ballooned. When the market turns down, the dynamic goes into reverse. Only a very few owners of a collapsing financial asset trade it for money at 90% of peak value. Some others may get out at 80%, 50% or 30% of peak value. In each case, sellers are simply transferring the remaining future losses to someone else. In a bear market, the vast majority does nothing and gets stuck holding assets with low or non‑existent valuations. The "million dollars" that a wealthy investor might have thought he had in his bond portfolio or at a stock's peak price can quite rapidly become $500,000, $50,000, $5000 or $50. The rest of it just disappears. You see, he never really had a million dollars; all he had was IOUs or stock certificates. The idea that it had a certain financial value was in his head and the heads of others who agreed. When the agreement about price changed, so did the value. Poof! Gone in a flash of aggregated neurons. This is exactly what happens to most investment assets in a period of deflation.


What Makes Deflation Likely Today?

Following the Great Depression, the Fed and the U.S. government embarked on a program, sometimes consciously and sometimes not, both of increasing the creation of new money and credit and of bolstering the confidence of lenders and borrowers so as to facilitate the expansion of credit. These policies both accommodated and encouraged the expansionary trend of the 'Teens and 1920s, which ended in bust. A far larger expansionary trend began in 1934 and accelerated dramatically in 2008.

Other governments and central banks have followed similar policies. The International Monetary Fund and the World Bank, funded mostly by U.S. taxpayers, have extended immense credit around the globe. Their policies have supported nearly continuous worldwide inflation. As a result, the global financial system is gorged with debt.

Conventional economists excuse and praise this system under the erroneous belief that using force to increase the availability of money and credit promotes economic growth, which is terribly false. It appears to do so for a while, but in the long run, the cost of servicing the swollen mass of debt destroys the economy.


Broader Ideas of Money

It is a good thing we have defined deflation as a reduction in the volume of money and credit, so we are not forced to distinguish too specifically between the two things in today's world. Exactly what paper and which book entries should be designated as "money" in a fiat‑enforced, debt‑based, paper currency system with an overwhelming volume of credit is open to debate.

Many people believe that when they hold stock certificates or someone's IOUs (in the form of bills, notes and bonds), they have money. "I have my money in the stock market" or "in high-yield bonds" are common phrases. In truth, they own not money but financial assets, in the form of corporate shares or repayment contracts. As we will see in Chapter 16, even "money in the bank" in the modern system is nothing but a call on the bank's loans, which means that it is an IOU.

A vast portion of the population has come to believe the oft‑repeated phrase, "Owning shares of a stock fund is just like having money in the bank, only better." They have put their life's savings into stock funds under the assumption that they have the equivalent of a money account on deposit there. But is it money? The answer to all these questions is no, but people have come to think of such assets as money. They spend their actual money and take on debt in accordance with that belief. Because the idea of money is so highly psychological today, the line between what is money and what is not has become blurred, at least in people's minds, and there is where it matters when it comes to understanding the psychology of deflation. Today the vast volume of what people consider to be money has ballooned the psychological potential for deflation far beyond even the immense monetary potential for deflation implied in Figures 7‑1 through 7‑8.


200417 - image1

200417 - image2

200417 - image3


A Reversal in the Making

No tree grows to the sky. No shared mental state, including confidence, holds forever. The exceptional volume of credit extended throughout the world has been precarious for some time. As Bolton observed, though, such conditions can maintain for years. When the trend toward increasing confidence reverses, the supply of credit, and therefore the supply of money, shrinks, producing deflation.

Recall that two things are required to produce an expansionary trend in credit. The first is expansionary psychology, and the second is the ability to pay interest and principal. After nearly nine decades of a positive trend, confidence has probably reached a limit, while a multi‑decade deceleration in U.S. economic expansion will soon stress debtors' ability to pay. These dual influences should serve to usher in a credit contraction.

If borrowers begin paying back enough of their debt relative to the amount of new loans issued, or if borrowers default on enough of their loans, or if the economy cannot support the aggregate cost of interest payments and the promise to return principal, or if enough banks and investors become sufficiently reluctant to lend, as happened in 2008, the "multiplier effect" will go into reverse. Total credit will contract, so bank deposits will contract, all with the same degree of leverage with which they were initially expanded.


How Big a Deflation?

As of September 2019, there was $1.4 trillion on reserve at the Fed plus $118.4 billion in cash on hand in banks' vaults. This $1.52t. of total reserves backs the entire stock of bank credit issued in the United States. This amount equates to 1/50 of all U.S. debt outstanding, valued today at $74.6 trillion. Those figures do not take into account all the IOU‑ifs and social‑program promises listed earlier in this chapter, of which the base money supply couldn't cover 1/160th in a financial crisis.

Of course, since the dollar itself is just a credit, there is no tangible commodity backing the debt that is outstanding today. Real collateral underlies many loans, but its total value may be as little as a few cents on the dollar, euro or yen of total credit. I say "real" collateral, because although one can borrow against the value of stocks, for example, they are just paper certificates, inflated well beyond the liquidating value of underlying companies' assets. Home and auto loans are backed by collateral, but what will used cars and stagnant homes be worth in a depression? One can also borrow against the value of bonds, which is quite a trick: using debt to finance debt. As a result of widespread loans made on such bases, the discrepancy between the value of total debt outstanding and the value of its real underlying collateral is huge. It is anyone's guess how much of that gap ultimately will have to close to satisfy the credit markets in a deflationary depression. For our purposes, it is enough to say that the gap itself, and therefore the deflationary potential, has never been larger.


How to Protect Yourself and Profit from Deflation and Depression

Making Preparations and Taking Action

The ultimate effect of deflation is to reduce the supply of credit, which serves as most people's money. Your goal is to make sure that it doesn't reduce the supply of your credit and money. The ultimate effect of depression is financial ruin. Your goal is to make sure that it doesn't ruin you.

Many investment advisors speak as if making money by investing is easy. It's not. What's easy is losing money, which is exactly what most investors do. They might make money for a while, but they lose eventually. Just keeping what you have over a lifetime of investing can be an achievement. That's what this book is designed to help you do, in perhaps the single most difficult financial environment that exists.

Protecting your liquid wealth against a deflationary crash and depression is pretty easy once you know what to do. Protecting your other assets and ensuring your livelihood can be serious challenges. Knowing how to proceed used to be the most difficult part of your task because almost no one writes about the issue. This book remedies that situation.

Here's Your Next Step...

We hope these excerpts from Conquer The Crash help you understand more about deflation, when it occurs, how it will impact you and more. From reading this report, you are already further ahead than most people.

The rest of Conquer The Crash delivers specific strategies to help you prepare your business and your finances. It's the ultimate guidebook for anyone who wants to stay safe, so that they can buy investments for pennies on the dollar later.

It helps you answer the following questions:

  • Is my bank safe?
  • Is my pension safe?
  • What risk does my mortgage hold?
  • Which bonds are a safe investment? Which ones might go to zero?
  • Will gold and silver go up or down in a depression?
  • How can I open accounts in the safest banks in the world?
  • Where can I find the safest money funds?
  • Is my insurance with a weak company?
  • Do I have a list of all the resources I need to survive a financial crash?
  • Is there a way to make money in a crash while staying safe?

There is no other book in the world like this one. There is no other meticulous explanation of the risks you face. No other book offers a careful prescription for how you can weather a financial crisis in full safety, without worrying.

Meet Your Author

Robert Prechter

Robert R. Prechter Founder and President, Elliott Wave International

Robert R. Prechter’s name is familiar to market observers the world over. Since founding EWI in 1979, Prechter has focused on applying and enhancing the Wave Principle, R.N. Elliott’s fractal model of financial pricing. Prechter shares his market insights in The Elliott Wave Theorist, one of the longest-running financial publications in existence today. Prechter has developed a theory of social causality called socionomics, whose main hypothesis is endogenously regulated waves of social mood prompt social actions. In other words, events don’t shape moods; moods shape events. Prechter has authored and edited several academic papers. He has written 18 books on finance and socionomics, including a New York Times bestseller.