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Former Fed Chair Paul Volcker Discusses What Could Bring on Deflation

Originally published by Bloomberg on October 24, 2018 Read the original article.

Paul Volcker headed the Federal Reserve from August 1979 through August 1987, and at 91 years old, remains a keen observer of the economy and the government.

He recently mentioned that the Fed’s monetary policy could inadvertently result in deflation.

Here’s an excerpt from an Oct. 24 Bloomberg article which Volcker authored:

Fear of deflation seems to have become common among officials and commentators alike. (Even back in July 1984, as my Fed colleagues and I were still monitoring the 4 percent inflation rate, the New York Times had a front-page story warning about potential deflation.) Actual deflation is rare. Yet that fear can, in fact, easily lead to policies that inadvertently increase the risk.

History tells the story. In the U.S., we have had decades of good growth without inflation — in the 1950s and early 1960s, and again in the 1990s through the early 2000s. Those years of stability were also marked by eight recessions, mostly quick, that posed no risk of deflation.

Only once in the past century, in the 1930s, have we had deflation, serious deflation. In 2008-2009 there was cause for concern. The common characteristic of those two incidents was collapse of the financial system.

We can’t expect to prevent all financial excesses and recessions in the future. That is the pattern of history with free markets, financial innovation, and our innate “animal spirits.”

The lesson, to me, is crystal clear. Deflation is a threat posed by a critical breakdown of the financial system. Slow growth and recurrent recessions without systemic financial disturbances, even the big recessions of 1975 and 1982, have not posed such a risk.

The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking, in effect standing by while bubbles and excesses threaten financial markets. Ironically, the “easy money,” striving for a “little inflation” as a means of forestalling deflation, could, in the end, be what brings it about.

Elliott Wave International agrees that “extreme speculation” is a sign that “real danger” is just ahead.

You may have heard of Ralph Nelson Elliott. In the 1930s, he observed recognizable patterns in the stock market’s price action, which he called the Wave Principle.

The September 2018 Elliott Wave Financial Forecast said:

In his last major forecast, Elliott noted that reckless speculation usually ends large market advances.

This is an ideal time to tap into the free report, “What You Need to Know Now About Protecting Yourself from Deflation.”

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