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An update from the continuing debate regarding inflation/deflation definitions. “j” being the original author of the previously quoted piece.

j Says:

Jake:

Credit contraction is not deflation, it’s a adjustment or a repudiation of the previous malinvestments. It is symptomatic of deflation but is not deflation.

Shed:

Commodity prices falling may be a symptom of deflation but it is not deflation.

Fly:

Again you misunderstand symptoms and causes. I really don’t know what you are talking about when you refer to your ” deflation rant”. Your comments didn’t prompt me to write this.

Anonymous:

Velocity is a tautology (as Mises) correctly described it.

Hillbilly:

Credit is NOT money.

Again let me repeat the definition of deflation.

Deflation is a contraction of the money supply bringing on a fall in the general price level in the economy.

Seeing there is no contraction in the money supply- in fact we have its opposite- there is no deflation.

November 28th, 2008 at 7:36 pm
Anonymous Says:

J, why do you insist on excluding “credit” from the definition of deflation? It is not strictly a reduction in money supply (M1 or other) and yet you keep arguing that fact, why?

According to Investorwords.com the definition of Deflation is “a decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. The opposite of inflation.”

Click to Edit November 29th, 2008 at 12:23 am

The argument has seemingly reached the question of whether “credit” constitutes money?

The answer one would think is obvious. Obviously not. Credit, is the money of the mind. As such, expanding credit is highly inflationary. The destruction, or contraction of credit therefore is disinflationary.

If I am granted credit, in any form, I can increase my “demand” for products and services. If everyone else is also granted “credit in the same amount” then, they can compete for the same “fixed” supply of products and services, thus, the general price level rises for all.

However, should the supply of products and services, increase proportionally to the expansion of credit, then, equilibrium is maintained, and price stability will ensue.

The expansion of credit can progress at many multiples of the potential in expanding production of goods and services. The phenomenal growth of China in GDP terms, stands as stark testimony to the rate of debt [credit] growth in the US & Europe.

Therefore the supply of $7.1 Trillion dollars from the Treasury & Federal Reserve constitutes what exactly? The answer to that question will answer the likely direction that the macro-environment is to take in the future.

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