Here’s a curve ball Edward as fodder perhaps for one of your articles: the theories of Friedman and even Von Mises developed in a world run by fiat money and a debt (credit) based money creation system itself run by banks tied to fractional reserve systems. Viewed through that lense all price level increases and decreases are pure money supply issues.

Falling prices do not just occur due to falling money supply. They can also occur due to falling demand whatever the money supply. (Yes, this is current eco-think heresy!). This is reflected in the attempt of monetarists to quantify demand for goods and services in the so-called “money multiplier”, which is a fudge for deficiencies in pure monetarist theory.

The demand for goods and services is currently falling off a cliff globally relative to supply. Supply systems were built at all levels (energy, industrial goods, cars, food, etc etc) for a rapidly expanding level of demand through 2007. The demand for all things is now contracting rapidly. Whatever the money supply, the demand for goods will continue to contract. This will result in falling prices whatever the money printers do.

So I’ve now taken off my monetarist hat and shown the heretic underneath. And just to keep things even I don”t buy fully into the Keynesian I+G+C+(X-M) economics bedrock either. Economics is an attempt to quantify human social behavior and occurs in waves of herding activity rather than nice quantifiable events that follow any set of mathematical formulae. Or at least I believe it does so in my not-so-humble opinion :-)