While Prechter has done some very interesting analysis at times, I find his conclusions to be ridiculous. I have heard him say multiple times that he thinks that all assets will drop 90-95%. (That’s right, just 90% wouldn’t have been dire enough… he had to throw in that they will drop at least 90%, and then drop in half from there). I think he is married to the idea of his repeating long wave cycles, and thus starts with the conclusion that we have to have deflation (because that’s what happened in the depression) and concocts the reasoning as to why it must happen. But that reasoning is flawed, because we have a completely different monetary system than we did back then. These attempts to forecast similar NOMINAL dollar outcomes between the depression and modern times just don’t add up. His counterpoints on this topic are just weak speculations, eg. that social mood won’t allow the Fed to print — I’m sorry but if we enter another deflationary downdraft, social mood will be screaming for the Fed to print and govt to “do something,” just like last time (but worse this time around). The attempts to dismiss the fact that we have a fiat currency that can be created at will, and that the prevailing school of thought in leadership and academia is that printing is the right thing to do, just do not hold water and I think he will be proven wrong.
Stockstradr, first of all thanks for the shout out. Second of all, I don’t actually disagree with you that it’s possible that there could be a lag time between a deflationary episode and a sufficient Fed response to offset it. That’s entirely possible, but I don’t think it’s a sure thing either. There are multiple mechanisms for inflation and I think the most likely one at this point is from a falling exchange rate for our dollar which could result if we experienced a greek-style crisis of confidence in our ability to pay our debt (which would be completely justified fundamentally). So maybe we do get another deflationary downdraft — but maybe we don’t. Our little national debt ponzi scheme could go on for years — but it could also end in months. I just don’t feel that one can predict the timing of such things, driven as they are by herd psychology.
Anyway, I wanted to make that distinction that I don’t actually disagree with you that that is a possible outcome. It is, but I believe there are other possible outcomes too.
Finally, I just want to remind everyone not to confuse money with asset values. These are different things. A reduction in asset values is NOT the same thing as money disappearing, and similarly, it is not valid to say that the Fed has to print X dollars to offset X dollars of asset value declines. This is just summing apples and oranges as they are totally different things. Similarly, a reduction in outstanding credit is not the same as the disappearance of money, and similarly it is incorrect to imply that the Fed has to print a certain amount of money to offset that same amount of defaulted or paid-back credit.
Prechter fails to make this distinction but he is incorrect. Real quickly: let’s say I have $10, and I lend it to a friend, and he lends it to another friend, who in turn lends it to a third friend. There is now $30 of credit in the system — but there is only $10 that can actually be spent. If everyone defaults, there is still $10 (the last guy has it) even though credit collapsed by $30. Credit growth and contraction certainly has its own effects — I do not deny this. But it is something different from money, and it should not be treated as if it’s the same thing and can be summed together (as implied by people who say that the Fed has to print X dollars to offset X lost credit).
As for asset prices, those are just prices. If the price of potato chips or semiconductors drops, that doesn’t represent a decline in the money supply. A drop in the price of an asset, like a potato chip, doesn’t reduce the money supply; it just shows that demand for that asset has dropped. True, assets can sometimes be used as collateral for lending, and asset value declines could impede future credit growth. But that’s not the same as a drop in the money supply, and it is not valid to say that the Fed must print X to offset X dollars in asset declines.
