Real nice post by Mish Shedlock over on his always excellent blog entitled Are we “Trending Towards Deflation” or in It?
I know many readers share my view on the inflation/deflation debate – namely that because we have a credit based economy, the Fed is relatively powerless to stop inflation. If that’s your take, then you’ll enjoy Mish’s piece.
And if not, hey, it’s always good to check your assumptions with a well thought out counterargument!
I define inflation as a net expansion of money supply and credit, with credit marked-to-market. Deflation is a net contraction of money supply and credit, with credit marked-to-market.
Given that consumer credit is plunging at unprecedented rates, given that credit dwarfs money supply creation, and given that marked-to-market valuations of credit on the balance sheets of banks is again falling, I propose we are back again in deflation.
My model suggests part of 2007 and all of 2008 were deflationary years. Inflation returned in 2009, and the economy is back in deflation now.
Proof is in conditions one would expect to see in deflation.
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