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What is Deflation, and Why Should You Care?

Many people believe deflation is defined as "falling prices." False. It is correct that falling prices are an effect of deflation, but find out why the real definition serves as a warning in the financial world of 2018.

Chances are, most people did not wake up this morning with deflation on their minds, or even give the subject a passing thought in the past month.

Deflation simply isn't a "blip" on most peoples' radar screens.

But, in EWI's view, it should be.

Before we get into why, let's review Webster's definition of deflation:

Deflation is a contraction in the volume of money and credit relative to available goods.

Notice that the definition does not include "falling prices." These are simply effects. Robert Prechter's Conquer the Crash elaborates:

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 this change is that the value of units of money are falling, not the value of goods.

Major deflationary periods are rare. The world did experience a dose from 2007 to 2009, but there's only been two full-blown deflationary episodes in U.S. history: 1835 through 1842 and 1929 through 1932. Major deflations are devastating and go together with economic depressions.

Given the definition of deflation, you probably won't be surprised that its precondition is a major buildup of credit -- or its flip side, the assumption of debt by consumers, businesses and governments. Indeed, those two historic U.S. deflationary depressions were set off by excess credit, or debt. That's what the periods of 1835-1842 and 1929-1932 had in common.

Now we can get back to why deflation should be a "big blip" on your radar screen.

Consider that global debt at the close of 2017 stood at a gargantuan $233 trillion, up from $216.5 trillion at the end of 2016, a 7.6% increase.

Here's a January 2018 chart and commentary from EWI analyst Murray Gunn:

Global Debt Graph

Debt in all sectors has increased over the last decade but what is particularly striking is the growth in government debt, which has nearly doubled in ten years. …

Governments and central banks have been more than willing to accept praise for averting, in their words, the "end of the global financial system" [in 2008]. But the reality is that the problem hasn’t gone away. Not at all. All that has happened is that the excessive financial sector debt in 2007 has simply been transferred to excessive government sector debt in 2018. …

This charade can go on only so long as confidence in the actors remains elevated. Once that goes, the deflation of this debt mountain will be a wonder to behold.

EWI already sees signs that this confidence is starting to erode.

Remember, almost no one anticipated the 2007-2009 global financial crisis, when "credit crunch" and "liquidity crisis" became household terms. Almost no one expected the two major deflationary depressions, either. Elliott wave analysts are in a unique position to see the early signs.

Our independent team of Elliott wave experts provides you with analysis of historical research that you simply will not find anywhere else.

Let them help you prepare for what we anticipate to be dramatic changes just ahead.

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