Research & Commentary

How the Psychology of Deflation is Manifesting Itself Today

Robert Prechter’s Conquer the Crash states: “The psychological aspect of deflation … cannot be overstated.” The manifestations of this psychology is already appearing. Learn where — and how.

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[Editor’s note: The text version of this video is below.]

Deflation is largely a psychological phenomenon.

A quick look at Japan offers an example. A Dec. 16, 2012 Reuters article noted:

A bargain-hunting psychology [in Japan] is so entrenched … that the government will struggle to convince people their incomes will improve enough for them to buy more expensive goods. … Consumers have spent so many years worrying about incomes and job security that finding ways to spend less has become a habit.

Let’s now turn our attention to Greece, which again has seen a flare up of its debt problems. The nation is running out of cash and seeking another bailout.

Greeks have seen this movie before. EWI’s just-published March Elliott Wave Financial Forecast describes the psychology of deflation in action:

Another illuminating aspect of the latest crisis is the behavior of Greek savers. Schooled by three prior “crises,” they are not waiting to secure the safety of their hard-earned cash. … Bank deposits fell 2% in the first six weeks of the year. Greek savers are “pulling their money out of Greek banks. The decrease most likely has to do with growing uncertainty in the face of the floundering negotiations with creditors.”

Greeks who are holding onto cash instead of making bank deposits know all too well what was mentioned in Prechter’s book, Conquer the Crash:

Every bank account is an I.O.U.for cash, not cash itself.

You may recall when a Greek “bail in” was in the news two years ago (Financial Times, July 4, 2015):

Greek banks prepare plan to raid deposits to avert collapse

Financial authorities had been discussing a “bail in” of up to 30% of deposits over 8,000 euros to avert a Greek banking system collapse. So, yes, during a major financial crisis, bank depositors might be unable to access their deposits.

Let’s return to Conquer the Crash:

If, despite all your precautions, you come to suspect that any of your chosen banks face the risk of closure, move your money to a safer bank immediately. If you cannot identify a safer bank, then do not hesitate to withdraw all of your money in cash.If you are not first in line, you may forfeit the opportunity.

At this time, the U.S. does not face a financial crisis. But, even now, there are hints of a budding deflationary psychology.

Review this chart and commentary from the March Elliott Wave Financial Forecast:

The U.S. personal savings rate bottomed at just 2.35% way back in September 2005. By the time of the Dow Industrials’ October 2007 top, a key divergence was developing. It is worth noting that the emerging conservatism depicted by the initial uptick in savings coincided with quite a drop in the stock market. Over 17 months from October 2007 to March 2009, the S&P 500 fell 58%. Financial assets of all stripes posted similar declines. The dashed line on the chart shows that on a short-term (since a February 2014 low of 5%) and a long-term basis, savers are becoming increasingly cautious.

“Caution” and “financial conservatism” are both part of a deflationary psychology, whichever the country.

The conclusion of EWI’s analysis is that the signs of deflation will grow more numerous during a major trend that is only just starting.

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