In this long post on his blog, well known blogger Mike “Mish” Shedlock argues that we are in the grip of a deflation which is the necessary aftermath of the recent 20-year bout of inflation which afflicted asset prices, a view shared by authority Carmen M. Reinhart who, together with Harvard professor Kenneth Rogoff have recently analysed nearly a millenium’s worth of financial crises for the purposes of their seminal book titled “This Time Is Different”. These experts are taken very seriously: indeed, just today, Prof Reinhart was presenting her conclusions from her work to a symposium of the world’s financial elite at Jackson Hole:

In the decade following the crises, growth rates were significantly lower and unemployment rates were significantly higher. Housing prices took years to recover, and it took about seven years on average for households and companies to reduce their debts and restore their balance sheets. In general, the crises were preceded by decade-long expansions of credit and borrowing, and were followed by lengthy periods of retrenchment that lasted nearly as long.

According to Mish, Reinhart, Rogoff and others, the deflationary depression economics that we are currently experiencing, which have so far been partially masked by an unsustainable expansion of sovereign debt, are the necessary aftermath to the past credit-fueled binge on asset values, especially land and housing. Just as the massive credit expansion caused inflation in asset values, so shall the credit contraction continue to cause great misery and pain in asset values at the back end of the credit supercycle. The implications for any investor exposed to heavily leveraged bets on property are clear: deleverage massively, or bleed massively while you wait in vain for asset prices to recover.

As Reinhart and Rogoff found in their research, by looking at the aftermath of past historical crises that were similar to the current one, it takes a very, very long time for asset prices to recover. Anyone pursuing the wait-and-see strategy can easily throw away much more cash paying interest vs. any possible capital gain while waiting for 10, 20 years or more (or never – see Is “Peak Oil” a mortal threat or just another inconvenience?) for asset prices to recover to their previous peaks.