Don't Believe the Hype About Hyperinflation

In a recent video, Robert Prechter says the Dollar's Hit a "Major Bottom" and that a deflationary depression is coming.

According to Prechter, the Elliott Wave pattern in the US dollar confirms we recently hit the fifth wave down. Next stop is up. He also notes that sentiment has reached an extreme:

"The Dollar Sentiment Index for the Dollar Index reports just 3% bulls among traders, an extreme level only five times in the past 20 years, usually near an important low," Prechter wrote on Aug. 5. "The last time we saw readings like this was March-July 2008, just before the dollar soared." In other words, the "short the dollar" trade is overly crowded.”

I mentioned the wave pattern on July 31 in Ewave Count on the US Dollar Suggests Move Up is Coming.

Here’s an updated chart.

US$ Weekly Chart



Note that bearish sentiment on the dollar is at an all-time high, even though the dollar index is substantially higher than it was in April and July of 2008. That's bullish for the dollar.

I still show 2 question marks on the chart because technically, wave 5s can extend. However, fundamentally and technically, I don’t expect it to extend -- at least by much.

Social Safety Nets Mask Deflationary Depression

Prechter is looking for a "major economic depression.” I think it’s clear we’re already in one.

The only reason it’s not more readily visible is because people are living in foreclosed houses, unable or unwilling to pay their mortgage; one in 9 people living in the US is on food stamps; and unemployment insurance has been extended twice. Congress is now debating extending it a third time.

If Congress doesn’t act, 500,000 Will Exhaust Unemployment Benefits by September, 1.5 Million by Year-End.

Although the official unemployment rate is a mere 9.5%, alternative measures show it’s over 16%. Moreover, an unprecedented 4.4 million workers have been unemployed and looking for work for 26 weeks or longer. Please see Jobs Contract 19th Straight Month and US Payrolls Less Than Meets the Eye for details about jobs.

In simple terms, more social safety nets are in place now than during the Great Depression.

Steepest Credit Contraction in Over 5 Decades

Given that deflation is a net contraction of money and credit, one might ask for proof that such a phenomenon is occurring. Dave Rosenberg put together a series of 5 stunning charts that I mentioned in US Consumer Credit Shows Steepest Contraction in Over 5 Decades.

Here’s one of them.

Consumer Credit Outstanding



Soaring Money Supply Versus Credit Expansion

Many point to soaring money supply as "proof" of inflation. That’s a misguided theory. Money sitting in banks as excess reserves because banks are scared to death to lend hardly constitutes "inflation.”