By Elliott Wave International
A buildup of an unsustainable amount of debt generally precedes devastating deflationary episodes.
The last brush the world had with deflation was the 2007-2009 financial crisis, which was accompanied by a huge amount of bad debt in the mortgage market. That financial crisis was the most severe since the Great Depression of the early 1930s, which itself was preceded by a mountain of unsustainable debt.
As Robert Prechter’s Conquer the Crash says:
A high-debt situation becomes unsustainable when the rate of economic growth falls beneath the prevailing rate of interest on money owed and creditors refuse to underwrite the interest payments with more credit.
The signs show that the global financial system may be approaching a tipping point.
The United Kingdom is a case in point. Here’s a chart and commentary from the January 2021 Global Market Perspective, an Elliott Wave International monthly publication which provides subscribers with analysis of 50+ markets worldwide:
[In the U.K.], the treasury took on another £31.6 billion in debt in November alone, 40% more than October, while public debt hit almost £2.1 trillion, or 99.5% of GDP, the highest ratio since 1962. Meanwhile, the deficit will widen to about £400 billion in 2020/21, or about 20% of GDP, according to the Office for National Statistics. That represents double the hit caused by the 2008 financial crisis. As we have been describing for most of the year, all of the puzzle pieces for the greatest financial crisis in history will soon be in place.
The U.K. is hardly the only place in the world where debt is reaching an alarming level.
Here’s what a Jan. 18 Wall Street Journal article says about the U.S.:
At 100.1% of gross domestic product, debt already exceeds the annual output of the economy, putting the U.S. in company with economies including Greece, Italy and Japan.
This headline is from the Toronto Star on Feb. 1:
Canada’s debt-to-GDP ratio is alarming.
The list of nations with troubling amounts of public debt goes on.
The special free report, What You Need to Know Now About Protecting Yourself from Deflation, provides more insights on the potential for a historic financial crisis.
Here’s a brief quote:
When social mood shifts, so too do lenders’, borrowers’ and investors’ plans for the future, shifting from expansion to conservation to preservation. Money flow slows and defaults rise. Default and fear of default result in a cascade of debt liquidation known as a deflationary crash or spiral.
Prepare now for what may be just around the corner.
Follow the link to get the insights you need: What You Need to Know Now About Protecting Yourself from Deflation — free access.
This article was syndicated by Elliott Wave International and was originally published under the headline Historic Global Financial Crisis? “Puzzle Pieces” Will Soon Fit into Place. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.