It appears to me that there seems to be a bit of confusion out there about what the money supply is doing. Is it growing? is it shrinking? Inflation? Deflation? Stagflation? Obviously I am a hyper-inflationist... Our buddy Vox is a deflationist. So what gives? Does it matter?
Well... if we're going to talk about this we're going to have to establish some kind of basic vocabulary. For example... what is money? I know... you're thinking dollar bills and coins. Yes and no. Money is an exchange medium that is used to complete a transaction. The critical characteristic of money is that it does not require any additional transactions to satisfy the terms of the exchange. You got your money... and that's good enough. Lets look at gold for example. Gold is money. It always has been money. You want some of my cattle... you give me a small amount of gold... and we're done. Modern cash is similar. You give me cash.. I give you a cow or two... we're done. Cash is money.
What about debit cards? I swipe your debit card... I give you cows... we're not done. Your bank has to send money to my bank. That's an additional transaction. Debit cards aren't money. Same for checks. Checks aren't money either. They are IOUs for money.
Diamonds.. Silver... Paper... Copper... all of these things can be money... if they are employed to complete an exchange.
Are we good here? Questions? No? Ok then.
Now that we know what money is... what do we mean by money supply? Ok well now things get tricky. Obviously money supply means... the amount of money out there. And we know what money is. But how do we go about measuring it? Well... if we're being honest... the professional economists term would be for the process would be a "Wild Ass Guess". There are all kinds of problems in this sort of business... and most of them stem from the process of figuring out what to consider money and what not to count as money. Obviously we count all the hard cash... and hey lets count all the money in savings and checking accounts too. What about other things though?
CDs for example. Are CDs money? Well no.. I mean if I say I want 500 bucks for a cow... and you offer me a CD for 500 bucks... is that CD money? Well I have to go cash that CD in for the 500 bucks. So no... its not money. But Nate! Its just a certificate of deposit! No. Its an investment. Its gambling. You're asking me to accept a voucher for a bet as money. Nope. Not happening.
So... test time.
You pay 200,000 dollars for a house. 2 years later a real estate agent tells you that your house is worth 250,000 dollars. Another year later... an appraiser tells you your house is worth 300,000 dollars.
Has the money supply increased by 100,000 dollars in the last 3 years because of your good fortune?
No. It hasn't. That's not money. Its what I call potential money. It doesn't exist. It could exist under the right circumstances... but as of right now... it doesn't exist.
And... conversely... when that value goes down... that isn't the money supply shrinking either. Because you can't lose something that never existed in the first place. Savvy?
I'm going to offer an analogy. You're at a roulette table. You have 1000 dollars in chips on the line. You win... and you just add your winnings to your bet. You do this till you are betting 40,000k.
While the little ball is dancing on the wheel... deciding where it will land... how much money do you have?The answer is none. You don't have any money at all. Your money is on the line in a gambling venture.
That's investment. That's why investments aren't money. They are just gambling with varying degrees of risks. And what is debt? Debt is investment... or gambling.... its one party gambling that another party will pay back more than was originally lent.
Now that we know all this... can you start to see why Deflation is not in fact happening? Because Z1 measures debt... and...
Debt is not money.
No amount of debt disappearing can ever be considered deflation. If inflation and deflation are respectively the number of horses going up or coming down... then an increase in horses cannot be offset by a decrease in cows. Cows aren't relevant to the measurement.
What we are seeing is inflation. The money supply is exploding. Yes... debt is disappearing... yes... that is painful to an economy... its just not deflation.
***UPDATE*** Bloody hell!!!! Look I didn't expect this and its a rather piss poor time for me... what with the fact that I am leaving on some grand adventure in less than 24 hours and I will be gone for several days. Pile up your questions in the comments. I will address as many as possible tonight... in the ATF post? oh dear God...