We do know that inflation is a monetary phenomenon but we don’t know exactly what money is. It is not any of the M’s people use – M1, M2, M3, MZM. They’re only proxies people use when they talk about inflation. We have great difficulty identifying something we can call true money.
Similarly, deflation seems to mean (depending on the commentator) falling prices, decreasing money supply, or decreasing velocity. Falling production, diminishing trade, and rising unemployment are also (sometimes) taken as signs of deflation, I suppose because they imply a decrease in money velocity.
Putting aside the tussle over definitions, what inflation means to the average person is a fall in the value of the currency. Your average Jane doesn't care if it came from money printing or China dumping dollars or economic recovery (i.e. increasing velocity); she just knows she can't buy as much at the grocery store because the dollars in her wallet are losing value. I'm swearing off the use of the term "inflation," which is now so fraught that it can derail a conversation as fast as you can speak the word. The better term is currency devaluation. This covers multiple economic scenarios, as well as devaluations by government decree.
Similarly, deflation might be replaced by the simple term decline. Maybe sales and prices are down because credit has dried up, or because money is not changing hands because people are afraid to spend, or because unemployment is skyrocketing, or because international trade has slowed to a trickle. People claim we need to understand the real cause of deflation, and they'll argue about (for instance) whether it was an insufficient money supply that caused the Great Depression, or insufficient velocity. I'm frankly sick of this particular debate. However it happened, you fix deflation by printing money and spending it on production and on nothing but production. If you're on a gold standard, you get extra money by redefining the exchange rate between your currency and gold, as FDR did.
Because people insist on using the terms inflation and deflation, it's very difficult for the human mind, which likes dichotomies, not to see these as opposites. The prefixes imply that they're opposites, and besides, that's just how homo sapiens think. Certain schools of thought, such as the strict Austrians, define them as opposites.
And yet, the United States is currently experiencing both, as the dollar erodes relative to other currencies, gold, and crude oil, even while unemployment soars and industrial output tanks. We are experiencing both economic decline and currency devaluation, simultaneously. There is nothing opposite about these trends. In fact, it's easy to see why they would go hand in hand, because who wants the currency of a nation that's an economic and fiscal basket-case?
Quoting from How Deflation Creates Hyperinflation [i.e. Currency Collapse]:
As an example of deflation leading to hyperinflation, consider the case of the Weimar Republic. In 1920, Germany experienced a deflationary collapse, with the average citizen finding it harder and harder to get enough money for necessities. Banks, short of money, could not honor checks, and businesses were strapped for cash to buy materials and meet payroll. Fearing a collapse that would throw millions of workers out on the street, the German government desperately printed money in an attempt to re-inflate the economy. During this period, despite the government's money printing, the mark actually gained in value against foreign currencies, so that prices of imported goods fell by some 50%.
Eventually, as a result of the money supply's rapid expansion, the nation's massive foreign debt, and the shrinking economy, German citizens lost all confidence in their currency, and the Weimar Republic experienced one of the worst cases of hyperinflation in modern economic history. Billions of hoarded marks came out of hiding and entered the marketplace. The [table] below tells the rest of the story.
The table, which you can see by following the link, details the rise of the price of an ounce of gold from 170 Marks in January 1919 to 87,000,000,000,000 Marks in November 1923. Obviously the price of gold did not change; the Mark lost virtually all its value.
Hitler renewed the devastated German economy by printing new Marks but insisting that they be tied to equivalent amounts of real production and real labor [see previous post]. The German people did not love Hitler in the mid-30's because he hated Jews; they loved him because he had restored their quality of life. (There is a lesson in this: any horrific monster can come to power if he can fix the economy.) Ellen Brown cites another example of printing one's own money in order to fund real production, in this case on the impoverished and indebted island of Guernsey circa 1815:
The end result of the Guernsey Experiment was spectacular – new roads, sea defenses and public buildings were established, fostering widespread trade and prosperity. Full employment was achieved, no deficits resulted and prices were stable, all without a penny paid in interest. What started as a trial led to a string of construction projects, which still stand and function to this day. Money was used in its purest form: as a convenient mechanism for oiling the wheels of commerce and development.
As much as I have learned from "hard money" advocates who abhor money printing of any kind, it does seem that there are examples where money was printed out of thin air and this engendered spectacular recoveries. Western elites don't want this idea getting out, because they like to control currencies themselves. They don't want states, counties, or cities getting any funny ideas about wresting control from the private mega-banks who issue our money. After all, the private mega-banks rely on everyone paying them interest on loans which they created out of thin air. That is, the private banks rely on legalized robbery for survival.
When new money is printed intelligently, and used to encourage only real wealth (that is, labor and production), it can be a society's salvation. The question is: Who figures this out first? The People, or another Hitler?
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