Technically, inflation and deflation are terms that indicate a particular combination of money surplus or deficit (respectively), demand for money (of which velocity is but one measure), and demand for various goods and services (which themselves may be in abundance or short supply).
The reason that the inflation vs. deflation debate has been so noisy, yet simultaneously so murky, is that all of these intersecting variables impact the final equation. It is like the difference between trying to balance a single broomstick on your outstretched hand vs. trying to balance a broomstick with three well-greased hinges at points along its length. The former is tricky enough to balance; the latter would be impossible for nearly everyone.
Some try to reduce the inflation/deflation debate to a single broomstick (“…all we need to do is look at declining credit and see that we are in deflation!”), but in my opinion, that is far too simplistic a view. We still need to consider base money creation, velocity, and the relative level of faith in current and future monetary policy among the majority of market participants.
Because we cannot really know all the variables and how they are feeding back and forth between each other, we must simply look at the final impact to gauge where we are. Fortunately, we can do this with relative ease.
Again, what we care about at the end of the day is whether our future money will buy more, or whether it will buy less — and, naturally, whether we will even have any coming our way.
The argument for deflation says that because of declining credit, people will hold onto whatever money they have for dear life, unsure if more money will be forthcoming. In this case, the velocity of money will slow and collapse.
The argument for inflation includes the idea that existing debts are a form of money and that the world’s central banks are busy printing up more than enough new money to swamp both the commodities markets and people’s preferences to hold something that can be created without any effort or cost.
Many in both the inflationist and deflationist camps say that prices are not worth analyzing because they are the result of, not the cause of, either “-flation.” But it would be a mistake to ignore prices simply because they represent the passenger, not the driver, in the story. Knowing where the passenger is going can give you a pretty good indication of where the driver is headed, and therefore it’s important to keep a close eye on prices when assessing inflation/deflation.
To read the rest of the original article by Chris Martenson click on the link below;
Don’t Be Fooled: Inflation Has The Upper Hand – Blogs at Chris Martenson