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.
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: firstname.lastname@example.org or write: The Bear Market Report, Clif Droke, P.O. Box 3401, Topsail Beach, N.C. 28445-9831.