The new economy of Retroflation
Modern economic thought, encumbered as it is with traces of Marxism,
tainted with the flaws of Adam Smith, and permeated with the fallacies of
J.M. Keynes, has not the scope nor the vocabulary to address the problems
unique to today's economy. "The old generals fight the old wars," as the
saying goes, and today's economists seem obsessed with an economic paradigm that reaches its apex 20 years ago and has been waning ever since, namely, inflation.
The popular economics of today seems able to only proceed in one
direction-toward address the supposed "constant" of inflation. Few
traditional economists are conversant enough with deflation and the many
problems it presents to even begin to ponder its intricacies and effects.
Even worse, none of the economists in places of authority within the
government have anything in the way of a deflationary economic policy.
Truly, their bag of tricks only runs so deep and the weapons of their warfare
are mere sticks and stones in comparison with the heavy artillery necessary
to war against the looming leviathan of deflation.
What is sorely needed is an economic approach with which to confront the
specter of runaway deflation, which at every moment threatens to suck into
its vortex the economies of the world, a death spiral from which there is no
escape. Before such a system can even be discussed, however, there must be terms suitable for address the current economic environment of deflation. To that end, we would like to introduce a term that we believe aptly describes the combined financial and economic climate of the next several years: Retroflation.
In our estimation, this term is the best one we have ever come across
that adequately summarizes the prevailing economic conditions of our day. To our knowledge, this term has never been used before. The term was coined by one of our readers, who wrote the following message recently:
"Being in paper has more risk than being in gold at this point in the
cycle. Thus holding a core of gold stocks or gold bullion perhaps is
critical at this junction. The dollar may survive or it may not. It may buy
many more paintings during the deflation you predict, for example, and at the same time less food and medical care and other essentials. I think a new
word meaning deflation of non-essentials with inflation of essentials needs
to be invested. I suggest Retroflation. It means returning to an era when
value was placed on what was valuable and essential. So Retroflation would
mean deflation of luxury goods and inflation of essentials."
In our opinion, this qualifies as a major step forward in economic
nomenclature. What other term even comes close to summarizing the unique
facets of late runaway deflation, namely, collapsing prices of financial
products and non-essential goods and services, and the rising prices (in
relative terms) of essential tangible items plus precious metals. As we
asserted above, without suitable terms no meaningful discussion of economic
policy concerning deflation is even possible. Why not begin with the concept
of Retroflation and develop it from there?
Unfortunately, many still seem to be in denial regarding the very real
presence of deflation. As unbelievable as it sounds, there are some who
still talk in terms of hyper-inflation. Witness, for example, the following
letter from a reader last week:
"Your 11/02 posting Vol. 2 suggests there will be no inflation due to the
massive growth in financial aggregates by the FED. You also suggest that
there will be demand for the excess printing of money by the FED. If,
however, the demand is from purely financial institutions, bullion banks,
wall street houses, banks with massive derivative positions, etc. I suggest
the answer is yes to inflation. The ordinary person, the dying corporation
has no interest in borrowing more money at this time. Our government and the FED (not our government) is priming the pump to salvage the cause of the stock market and other bubbles."
The answer to this is that while there may be diminishing interest in
taking on added debt at this time among consumers and corporations. However, the public still demands money-and lots of it-in the interest of amortizing their (enormous) existing debts. The combined public and institutional debt will take quite some time to extinguish, and until it is, no inflation is possible.
In our current position along the economic K-wave, deflationary conditions will continue to reign supreme until at least the middle of the decade. Economists may as well face up to this unavoidable fact and begin discussing economic approaches accommodative to this condition rather than contrary to it. Doing that requires two things: Firstly, forget about the "old war" of inflation. Secondly, employ terms appropriate for discussing a deflationary market/economic policy. The as yet infant and under-developed concept Retroflation is a good place to start.
Clif Droke
November 6, 2001
Clif Droke is the editor of the weekly Bear Market Report, a combined
forecast and analysis of U.S. stocks and indices and international precious
metals stocks, and is the author of numerous books on trading and technical
analysis (most recently Gann Simplified, published by Traders Library). For
a FREE COPY of the Bear Market Report send e-mail to: bearmarket@bigfoot.com or write: The Bear Market Report, Clif Droke, P.O. Box 3401, Topsail Beach, N.C. 28445-9831.
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