Research & Commentary

Deflation Basics, What You Need to Know

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Deflation is widely discussed but not widely understood. To take you through the basics of what deflation is and is not, ElliottWaveTV sat down with Murray Gunn, lead writer of, as he explains the key concepts about deflation and what you need to watch out for.

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

Dana: Hi, I’m Dana Weeks, and I’m here today with Murray Gunn. Murray is editor of Elliott Wave International’s European Short Term Update, and lead writer on Welcome back, Murray.

Murray: Thank you, Dana, it’s great to be here.

Dana: So, I’d like to focus today on deflation. It’s kind of a complicated subject, and it’s easy for people to misunderstand it. I’d like to just start off by asking you to tell us, what is deflation?

Murray: Well, very simply, deflation refers to the contraction of money and credit within an economy. And inflation is the opposite of that, that’s an expansion of money and credit in an economy.

Dana: And what’s the difference between price and credit deflation?

Murray: Well, unfortunately, over the last few decades, the word deflation has been used or referred to consumer prices that are falling, or falling prices in an economy. And this is wrong. Prices can change, go up and down, for many different reasons based on the dynamics of supply and demand. Debt deflation, credit deflation is a different phenomena, and it can be extremely devastating.

Dana: And with price and credit deflation, which one is more important and why?

Murray: Well, debt deflation, credit deflation, we use those in the same breath. They are the most important because they can be extremely devastating when that deflation occurs. They can develop into what is called a debt deflation spiral, and that involves individuals and corporations defaulting on their debt.

Dana: So Murray, can you explain that a little further? Because price is not deflating, it’s actually inflating at the US, though at a bit lower rate than people would expect under the circumstances, so tell me about that. What do you think of that?

Murray: Well, that is true. Consumer prices in the US are inflating, in terms of price inflation terms. But price inflation, consumer prices, producer prices, they can move around for very different reasons, many, many different reasons based on the dynamics of supply and demand. Monetary inflation and monetary deflation, credit deflation, that is a phenomena based on the cycles of social mood, and that is why it’s the most important thing to look at.

Dana: So the connection between social mood and credit cycles, I’m not quite following that, Murray. Can you expand on that?

Murray: Well, social mood is the driver of the economy. And the lead indicator of the economy is the stock market, what is also called a sociometer. So, social mood drives human behavior, human behavior drives economic activity, and economic activity drives a debt bubble. And when stock markets rise, debt rises. When stock markets go down, and the economy goes down, debt deflates.

Dana: So let’s move on, do you believe that deflation is a global phenomenon, or is it localized?

Murray: Well, debt deflation can be extremely localized. If we look at the history, we can see that some countries, and even some regions and cities within countries, have experienced debt bubbles in the past. And when these debt bubbles burst, that is debt deflation. So, some examples might be emerging countries, and the recent example of the municipality of Puerto Rico. From a global point of view, yes, there have been occasions in the past where there has been a debt build-up, in a global sense. The 1920s was an example, and into the deflation of the 1930s. And if we look at what’s happening now, and as we sit here in 2018, there is a global debt bubble that’s built up over the last two or three decades, and so, the next debt deflation that we’ll experience should be the worst that the world has ever seen.

Dana: And let’s move on to the last question, Murray. What are the key metrics to watch over the next quarter or two to gauge deflation?

Murray: So, the main metrics that we’ll be looking at are the stock markets themselves, and related to that are corporate and other credit spreads in the bond market. And also we’ve developed our own proprietary indicators, called the money and credit indices, or MACI, and you can find them right here on

Dana: All right, well, thank you so much, Murray. I look forward to delving into this topic more with you in the future.

Murray: Thank you, Dana.

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