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Subject:  Deflation=Crashes? Date:  3/26/2002  1:41 PM
Author:  jono202 Number:  3940 of 6186

A article by Robert Prechter, on deflation.

A deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people's desire and ability to lend and borrow. A depression is characterized in part by a persistent, sustained, deep, general decline in productivity. Since productivity provides debtors the means to repay and service debt, a depression supports deflation. Since a decline in credit reduces new investment in economic activity, deflation supports depression. Because both credit and productivity support the prices for investment assets, their prices fall in a deflationary depression. As asset prices fall, people lose wealth, which reduces their ability to offer credit, service debt and support productive enterprise. This mix of forces is self-reinforcing.

People seem to take for granted that financial values can be created endlessly seemingly out of nowhere and pile up to the moon. Turn the direction around and mention that financial values can disappear into nowhere, and they insist that it is not possible. “The money has to go somewhere… It just moves from stocks to bonds to money funds…It never goes away…For every buyer, there is a seller, so the money just changes hands.” Sounds logical, doesn't it? It isn't.

The thing is just how long this over loaded donkey can keep going.


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