The total supply of US dollars, as measured by TMS, is about 10% higher now than it was a year ago. Also, the total amount of credit within the US economy is higher now than it was a year ago thanks to the government's yeoman-like efforts to replace the bursting private-sector credit bubble with a public-sector credit bubble. With the supply of money and credit continuing to expand -- at an accelerated pace, in the case of the money supply -- you have to be inventive in order to make an argument that the US is experiencing deflation. You must either argue that non-monetary quantities such as collateralised debt securities and other derivatives form part of the money supply, which is the tack taken by the author of the article posted HERE, or argue that a decline in the combined market value of debt counts as deflation, which is what Mike Shedlock routinely does at his web site. Neither argument is valid, in our opinion.I recommend the entire article. Inflation is here now. Yes, the prices on big ticket items are down due to a lack of demand - enjoy that while you can.
The idea that collateralised debt and other products of the 'shadow banking system' constitute money holds no water because you can't use these things to buy goods and services. If you don't believe us, try handing an ABS (Asset Backed Security) to the person at the Walmart checkout and see how far you get. Securities of various types can be posted as collateral when purchasing other investments, but that just means they have perceived value, not that they are money. Money is the general medium of exchange.
The idea that a decline in the market value of debt constitutes deflation boils down to defining deflation in terms of prices (the price of debt, in this case). However, the market values of debt and other investments rise and fall for many reasons, some of which are related to inflation/deflation and some of which aren't. The point is that a decline in the market value of anything (including debt) does not, in and of itself, constitute deflation.
There was (and is?) some huge number of credit default swaps worth $50 trillion dollars or maybe even 10 times that. I don't think anybody really knows the amount. If that was "real" money then we would have seen price inflation due to massive monetary inflation. But that money was just accounting entries. (The magic of banking is converting those accounting entries into real profits, but I digress.) Therefore as that money disappears we do not see massive price deflation. It was generally just imaginary bookkeeping ala Bernie Madoff.
Bad money chases out the good money. By that is meant that as more bad money enters circulation people will tend to hoard the good money.
Not all things people think of as money is money - and not all money is the same. Right now, some Starbucks are not taking checks because they are likely to bounce. Therefore a check is not the same as cash or even a credit card!
The amount of "real" circulating money has gone up and continues to go up. That leads to price inflation and that's what is happening.
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I'm still giving thought to the idea that bank credit is a different type of money. But regarding TMS, Mish talked about that almost a year ago. http://tinyurl.com/3tb4bv and calculated M' based on Frank Shostak's variation. His chart at that time showed M' had not expanded as much as TMS. I have not been able to locate any recent chart of M'. I would value that more than a chart of TMS. I think that to indicate inflation or deflation, the absolute money supply should be divided by the population, and perhaps not just the raw population but adjusted by age groups. An expanding population would need more money and a contracting population less money. Harry Dent looked at population issues extensively in his various books, and predicted the timing of the bust very accurately 10 years ago just based on demographics. Around the year 2000, Harry Dent predicted the bust would hit around 2008-2009 based on the age ranges of the population. - Vincent
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