I don’t claim to be very smart on macro econonics, like a lot of lurkers here, I learn from reading this and a couple other blogs.
The best simple definitions of Inflation / Deflation that I have read are simply that Inflation is the creation of wealth, and that deflation is the destruction of wealth. Wealth- obviously can be defined as actual $$$’s (paper or Electronic, “Stuff” (material goods) or even tranferable Debt (The future value of debt anyway … to whomever is getting the monthly payment).
The bursting of the bubble will lead to the destruction of close to a trillion dollars before it is over with. This trillion dollars (A number you could certainly argue up or down) was the notional value of home equity gains and may or may not have been turned into other forms of wealth via HELOC and refinance. Either way – this wealth is rapidly evaporating… it will be gone. This is the destruction of wealth and must be viewed as deflationary.
The inflation / creation of wealth already happened from 2000-2005 via all the paper gains. We are now deflating.
If the US Govt actually buys MBS mortgage debt (which I think would require a change in federal law) – they could potentially create more real debt. (By purchasing them for more then they are actually worth, they would in essence be creating dollars…) this would be inflationary. Until this happens, wealth is still being destroyed (if you owned Bear Stearns Stock… your wealth was destroyed).
I think the price increases we are seeing come not from the creation of dollars, but from the devaluation of the dollars currently in existance. Price increases do not in themselves constitute inflation, and in my thoughts may be more based on deflationary pressure and the consequent reactions to that pressure.
