Sorry, just re-read our article and I agree with almost everything you said. Also, I think it is probably the most complete argument for inflation that I have read, which is a lot over the past few years. However, an area that I think is unclear is how *credit* acts in the economy. And this is probably your biggest divergence with the deflationist argument.
I think Steve Keen’s take on it is interesting. It’s the difference between theoretical and real life. I’m not sure if he is correct, but brings up some interesting points not to be dismissed.
If neoclassical theory was correct, this increase in the money supply would cause a bout of inflation, which would end bring the current deflationary period to a halt, and we could all go back to “business as usual”. That is clearly what Bernanke is banking on:
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The only way that Bernanke’s “printing press example” would work to cause inflation in our current debt-laden would be if simply Zimbabwean levels of money were printed—so that fiat money could substantially repay outstanding debt and effectively supplant credit-based money.
Measured on this scale, Bernanke’s increase in Base Money goes from being heroic to trivial.
An understanding of the scale of the inflation we have lived through requires far more than looking at CPI or even casting an eye over conventional money supply measures. It is necessary to appreciate the role of credit and the massive scale of a credit expansion that largely took place in the unregulated shadow banking system. Credit is the critical factor, as the ‘moneyness’ of credit in a myriad different manifestations drove the expansion of the effective money supply
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Now that credit is contracting, that ‘free money’ has turned into unpayable debts and illiquid asset markets, which will eventually have to be marked-to-market. Now balance sheets must be rebuilt and neither borrower nor lender is willing to dig themselves into an even deeper hole. The velocity of money will inevitably fall dramatically as risk aversion rises, reserves are held again looming defaults and cash is hoarded. The scale of the bad debt in our global economy is gargantuan. The Fed cannot midwife credit creation under those circumstances, and things will get much worse before they get better.
Second, you mentioned that if the Fed wanted to they could issue everybody debt cards to inflate. They could, but I think there is a line the won’t cross, at least not while the international debt financing model is still in place. I also think their is a line in government spending that is getting fought on the political front as I write this and the elections coming up could put a damper on. Which would feed into Prechter’s theory. They already blocked unemployment benefits. The 787 billion stimulus is almost spent as well.
Third, Is behavior on the consumer front, which officialdom can’t force. They sure can encourage, but that is about it. A dramatic example would be consumers, en masse, not taking on new debt, spending very little and paying down old debt. Herding behavior is a very powerful force not to be over looked. Panics can change behavior on a dime and probably would render a printing press useless at least in the short term. I’ve been deflationary for at least 5 years.
Lastly, just by looking at the macro and I’m not talking about prices or charts or anything. It certainly looks like there is less money in circulation regardless of what M2 says, people are not paying their debts, states can’t pay their bills, 8 million people are not paying their mortgage, restricted supply is keeping RE values level, wages and tax receipts are stagnant or down, etc..
