Are Fears of Inflation Misplaced?

Originally published by Seeking Alpha on March 21, 2018 Read the original article.

Elliott Wave International has shown that the stock market leads the economy. So, it’s not surprising that the economy has seen growth after a nine-year bull market.

Having said that, inflation has remained relatively subdued, which is remarkable considering not only the long DJIA uptrend but the massive stimulus programs that were implemented to combat the Great Recession.

In 2018, EWI holds firm to the view expressed in the March 2014 Elliott Wave Theorist:

The next big monetary event will not be more inflation but deflation, as the huge quantity of accounting-unit indebtedness, built on a foundation of accounting-unit indebtedness, becomes unpayable and contracts. Most people believe such an outcome is impossible.

Yes, upticks in the economy have many observers focused on inflation, not deflation. Indeed here’s a March 22, 2018 Bloomberg headline:

Fed Officials See 2.1% Inflation in 2020 and That’s a Big Deal

Yet, a Seeking Alpha contributor does ask in a March 21, 2018 headline, “Is Deflation A Bigger Risk Than Inflation?”

Here’s an excerpt of his thoughts:

A lot of people thought that creating trillions of dollars (or euros) of new bank deposits via QE would lead to hyperinflation. …

Clearly that didn’t happen. Instead, the last decade has been characterised by very low inflation, or even deflation. …

Immediately after the global financial crisis (GFC), commercial banks were woefully undercapitalised, as they struggled to deal with asset write-downs and multi-billion dollar fines for past misdemeanours.

This meant that money supply (deposits) from new lending collapsed for a few years. QE plugged the gap, albeit sending money to a different place (securities markets) than normal commercial or consumer loans (the real economy).

On top of the banks’ immediate GFC problems, regulatory capital and liquidity rules are far, far tighter now than they were in 2008. Governments and central banks understandably don’t want a repeat melt down. However, the negative, unintended economic consequences don’t seem to have registered with policy makers.

Put simply, the “normal” rate at which banks can create new loans is now much lower than before the GFC. …

In short, in debt-saturated economies that rely on credit creation for growth, there’s no longer nearly as much credit creation capacity, in relative terms. …

A contraction of the money supply is the very definition of deflation. …

You can read the entire article by following the link below:


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