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Before it became the worst credit crisis since the Great Depression, the credit crisis used to be an arcane topic discussed only in financial publications. Now, it’s on every computer, television screen, and front page of every newspaper in the world.

It may have you worried about what you can do to get through it with your personal finances still intact. What can you do about it?

Download Your Free Credit Crisis Survival Kit

Elliott Wave International, the world’s largest market forecasting firm, put together this free resource featuring 15 hand-picked reports and videos that will show you:

1. How we got into this mess
2. How to survive and prosper from it
3. When you can expect the crisis to end

The detailed analysis covers topics worrying you and millions (if not billions) of other people around the world who are learning more and more about the dangers of the Credit Crisis every day.

Here are just 5 of the 15 topics covered:

• How Do I Find a Safe Bank?
• What Happens During a Credit Implosion?
• How Do I Ride Out this Crisis?
• What If You Can’t Sell Your House?
• Buy & Hold or Sell & Fold?

Read All 15 and Download Your Free Credit Crisis Survival Kit

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The Primary Precondition of Deflation

By Robert Prechter, CMT
Elliott
Wave International

The following was adapted from
Bob Prechter’s 2002 New York Times and Amazon best seller,
Conquer
the Crash – You Can Survive and Prosper in a Deflationary
Depression.

Deflation
requires a precondition: a major societal buildup in the extension
of credit (and its flip side, the assumption of debt). Austrian
economists Ludwig von Mises and Friedrich Hayek warned of
the consequences of credit expansion, as have a handful of
other economists, who today are mostly ignored. Bank credit
and Elliott wave expert Hamilton Bolton, in a 1957 letter,
summarized his observations this way:

In reading a history of major depressions in the U.S. from
1830 on, I was impressed with the following:

(a) All were set off by a deflation
of excess credit. This was the one factor in common.

(b) Sometimes the excess-of-credit situation seemed to last
years before the bubble broke.

(c) Some outside event, such as a major failure, brought
the thing to a head, but the signs were visible many months,
and in some cases years, in advance.

(d) None was ever quite like the last, so that the public
was always fooled thereby.

(e) Some panics occurred under great government surpluses
of revenue (1837, for instance) and some under great government
deficits.

(f) Credit is credit, whether non-self-liquidating or self-liquidating.

(g) Deflation
of non-self-liquidating credit usually produces the greater
slumps.

Self-liquidating credit is a loan that is paid back, with
interest, in a moderately short time from production. Production
facilitated by the loan – for business start-up or expansion,
for example – generates the financial return that makes
repayment possible. The full transaction adds value to the
economy.

Non-self-liquidating credit is a loan that is not tied to
production and tends to stay in the system. When financial
institutions lend for consumer purchases such as cars, boats
or homes, or for speculations such as the purchase of stock
certificates, no production effort is tied to the loan. Interest
payments on such loans stress some other source of income.
Contrary to nearly ubiquitous belief, such lending is almost
always counter-productive; it adds costs to the economy,
not value. If someone needs a cheap car to get to
work, then a loan to buy it adds value to the economy; if
someone wants a new SUV to consume, then a loan to buy it
does not add value to the economy. Advocates claim that such
loans “stimulate production,” but they ignore the
cost of the required debt service, which burdens production.
They also ignore the subtle deterioration in the quality of
spending choices due to the shift of buying power from people
who have demonstrated a superior ability to invest or produce
(creditors) to those who have demonstrated primarily a superior
ability to consume (debtors).

Near the end of a major expansion, few creditors expect default,
which is why they lend freely to weak borrowers. Few borrowers
expect their fortunes to change, which is why they borrow
freely. Deflation
involves a substantial amount of involuntary debt
liquidation because almost no one expects deflation
before it starts.

For more on deflation,
including the following topics, see Elliott Wave International’s
free guide to deflation,
inflation, money, credit and debt. There, you can also
download two free chapters from Conquer the Crash.

Learn more about these six important topics:

1. What
is Deflation and When Does it Occur?

2. Price
Effects of Inflation and Deflation

3. The
Primary Precondition of Deflation

4. What
Triggers the Change to Deflation?

5. Why
Deflationary Crashes and Depressions Go Together

6. Financial
Values Can Disappear in Deflation

Robert Prechter, Certified Market Technician, is the
founder and CEO of Elliott Wave International, author of Wall
Street best sellers Conquer
the Crash and Elliott
Wave Principle and editor of The
Elliott Wave Theorist monthly market letter since 1979.

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