How can we fix the economy? How can we have a bull market in stocks again? They have to inflate the credit again. Total money supply is shrinking. Bernanke must paint a pink picture to bring back confidence. Otherwise deflationary spiral will cause Great Depression. The 1929 will be called the small depression. Bernanke's hands are tied. Not much he can do. According to Austrian school of economics there is no way to avoid deflation in the current credit based monetary system. The credit bubble has been inflating last 50 years. It is too big. We may have to live through the depression and NOT inflate it again.

This book, "Conquer the Crash" explained it well years ago:

http://www.tradingstocks.net/html/forecasting.html

At that time they ridiculed Prechter. Now it seems he just spoke the abvious. The reason for deflation is as follows: When you borrow money from the bank, bank does not give you existing money. It simply creates a promise to pay you that amount. In fact, all of bank accounts are "promises to pay". They are not real money. So they figure, people won't come and get the money at the same time, so they can honor these promises if only few asks for it. So whenever you get a loan, bank creates the money. This creation of new credit acts as if the money supply is inflating. FED helps this since 50-60 years. Almost all money in the economy is based on bank credit.

The problem with this approach is that this money is borrowed money and it has principle + interest component. As long as people borrow more, there is more money being created, so it is possible to pay the principle + interest. But the moment borrowing stops, economy slows down and velocity of money decreases, it becomes impossible to pay the interest, because that much money does not exist to earn! One cannot earn money that does not exist. When the credit inflation reaches such as level that the interest burden becomes too hard to carry, we face deflation. People do not borrow anymore. Therefore they cannot earn. Because the money to pay them is dissapearing. So people get laid off. Companies go bankrupt. It is a vicious cycle.

These videos tell the story piece by piece, somewhat slow, but if you have patience, it is good knowledge:

http://www.tradingstocks.net/html/banks_create_money.html

Due to these reasons, Prechter is recommending short after this expected rally:

http://www.tradingstocks.net/html/latest_opinion.html

The economy is not good and it cannot be good until the debt is reduced to a sensible level. That may take a while. Past generations had long periods of flat or down markets. We may be facing one. In fact, south sea bubble burst and the market took 100 years to get back up again. If it happened to some people, why can it not happen to us? What do we do if it does happen?