Mish makes the deflationary case. However, it is difficult for me to turn off the empirical evidence I see every day in my life when I buy milk, gas, and food as well as when I see broad measures of money supply numbers increase. BUt I do have an open mind, and I do see that the strictness of credit is clearly deflationary.
However, if the argument cannot be explained to an 8th grader I tend to discount it. For example, in 2004-2005 one could clearly see that home prices relative to incomes had expanded well beyond historic norms (see Rich’s primer). At that time, people tried to explain away this discrepancy with convoluted arguments.
Currently, we have inflationistas citing that broad measures of money supply are increasing and that the actions by the Fed are pushing down the value of the dollar (Thus requiring more dollars to buy goods and services).
The deflationistas are citing contraction in available credit (simple enough, I get that) coupled with esoteric arguments as to why basic measures of money supply (M2) are not reflecting the “real” effects.
I guess we will know how it turns out as things unfold over the next few years. We can argue all we want, but as Milton Friedman said, “The only relevant test of the validity of a hypothesis is comparison of prediction with experience.”
