BlackyBlack

Scary Drop in Velocity of Money: Is Deflation Knocking?

The future is here, and it wants its money back.

De-Leveraging Is Not Deflation

Why not consider this: deleveraging is a reduction in the velocity of money.

Why look at it that way? Because it's an effect, not a cause. Some of the drivers of the money supply collapsed, so the Fed, to compensate, increased its balance sheet. Don't assume this relatively huge increase in the Fed's balance sheet means inflation (in money supply or rising prices) in the near future. Despite these relatively abrubt increase in numbers, the money supply may still be deflating in real terms.

So while deleveraging is not deflation, you still may have deflation even though it appears that the money supply has doubled or tripled in size. People bring up velocity of money and the money multiplier at this point because if money is not moving through the economy its not really money (adding to money supply).

You say all this will change at some point and start up again at which point we will have inflation, but what mechanism will allow this to happen? How can you inflate the balloon with water once it has popped? This is the chief problem - the mechanism of money creation have been largely compromised or broken. Some permanently.