When Money Gets Scarce by Robert Prechter

[CrackSmokeRepublican]

When Money Gets Scarce by Robert Prechter Barron's 8/7/2010

    Some of Prechter's comments

    In the past two years, even lagging indicators have showed signs of deflation. But Americans lived in a climate of monetary inflation for three-quarters of a century. Inflation was "normal" for so long that it appeared to be the only possible reality. It is difficult to imagine its opposite, even when it is already happening.
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    Most high-profile bears in recent years have predicted hyperinflation and a collapse in dollar value due to money printing.
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    Federal Reserve's money printing, while significant, accounts for a comparatively small amount of the inflation that has occurred. The far greater contributor to inflation has been the relentless expansion of borrowing. Deflation, which is rare, results from a contraction in the quantity of outstanding debt.
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    In hyperinflationary times, people are desperate to get rid of their wheelbarrows full of money. In deflationary times, people are desperate to obtain money. Today, it is difficult to get anyone to part with a dollar. Homeowners can't make mortgage payments. Employees are taking pay cuts. Retailers are cutting prices. And jobs are scarce.
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    Even as monetary authorities urge banks to lend, Congress has curtailed credit by passing laws to regulate bank loans, reduce banks' proprietary trading, restrict profits from credit card fees, oversee credit-rating services and restrict the size of financial institutions. This trend is the opposite of the government's expansionary policies of the late 1990s and early 2000s, and it is deflationary. Recklessness contributed to inflation; conservatism will curtail it.

    The amount of dollar-denominated debt worldwide is some $57 trillion. Life insurance companies have pledged to pay trillions more. Foreign governments and enterprises have issued their own masses of IOUs. The value of derivatives, which can become debt if certain events occur, amounts to over $600 trillion.

    This already-issued debt and potential debt is poised to overwhelm the possibility of management or monetization. The Fed's assets amount to $2.3 trillion, a drop in the global debt bucket. Monetary authorities have done everything they can think of to bring back inflation, and they are failing. Central banks face a problem they facilitated: There is too much doomed debt in the world.
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    Most people seem to believe monetary authorities can and will inflate away all this debt.
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    The deflationary wave of 2006-2009 offered a taste of the risks incautious investors face. If you are positioned for more inflation—as the vast majority of investors are—you are likely to find yourself on the wrong side of the monetary bet. Positioning for deflation simply means avoiding traditional investments, especially risky debt, and maintaining maximum safety in cash and cash equivalents, held in the safest institutions.

    If you shed market and institutional risk, you can sail through deflationary times unscathed.

http://online.barrons.com/article/SB500 ... BOL_twm_fs