I found this quote on the free board at Bob Prechter's Ellliot Wave International:


"Ötodayís central banks are many multiples bigger than the biggest banks of 1929, and they have unlimited credit and no real-money standard. They are nothing less than super-banks, which can create credit from nothing; all a customer has to do is ask for it. Ah, but thatís the problem. Someone has to ask. The expansion of credit depends on willing and able borrowers. Debtors have to trust the future well enough to borrow -- and pay back with interest -- the credit the central banks have to offer. The root of todayís systemic dilemma is not mechanical, as the monetary engineers believe, but psychological. Bernanke thinks he can pull switches to prevent deflation. But you canít pull switches on a crowd. It pulls switches on you." -- Bob Prechter, Elliott Wave Theorist, December 2007.

I'm not an idiot market timing crap illuminati, but I find the 'madness of crowds' argument that Prechter makes vis a vis deflation very interesting. I'm still pondering the notion that deflation is a more profound phenomenon than is inflation which springs from a more 'mechanistic' (or hubristic) source i.e. the Central Bank moving a few interest rate pulleys and levers here and there. The inflationist still believes in the veracity of the pulleys and levers --albeit he feels the CB pushed or pulled too much in one direction and is thus guilty primarily of overcompensation. This idea however is not exactly revolutionary as it betrays a continued belief in the primacy of the levers.

But what if, as Prechter suggests, the switches are not mechanistic at all? What if they are the artifacts of an expiring belief system? Switches can only be pulled on a crowd still in the thrall of belief. In a sense, deflation represents a fundamental withdrawal from an existing belief system or worldview. People become so uncertain about the future that they recoil from it. One manifestation of this is the rejection of n+1 interest payments.

Consider a landscape where there are no future earnings. What if the notion of earnings loses all veracity (thank you FASB)? Deflation, I'm thinking, is thus psychological and not 'monetary' per se. As a psychological phenomenon, it is thus fundamentally irrational. Once deflation takes hold, all bets are off. This is why it is feared by the CB's more than inflation for which there are (it is generally believed) a series of prescriptive measures. For example, in Man vs. Inflation, Volcker won. This 'human victory' over diabolical economic forces is a powerful trope that, in some ways, still informs Bernanke's cocksuredness. (Though Volcker would hardly call Greenspan/Bernanke ardent acolytes.)

I wonder if ka-poom is still inside the temple. Deflation is a game-ender where people take their chips and go home. You can't plot or trend the chips when they all go home.