Milton Friedman is a recognized economist. He died in 2006 so he was well acquainted with our monetary system which consists of monetary units (dollars) and to some extent credit. As credit collapses, prices fall and certain measures of money collapse with it.

Why then did Friedman say, "Inflation is always and everywhere a monetary phenomenon."

Many deflationists confuse falling prices with a deflation experience. In the same way many people consider rising prices as an indicator of inflation.

It is true in a deflationary environment prices usually fall but they don't have to. If you were a believer in peak oil and suddenly the world became aware that your view was correct and we were running out of that which makes the world go round even if we were in deflation the price would likely rise.

We have recently experienced two things which seem deflationary. One was a deleveraging spiral causing lower prices. And two a need to settle those debts in U.S. dollars forcing a run on dollars and an increase in the price of dollars relative to other currencies; so naturally many see what they think is deflation.

I honestly don't know what to think, but if Friedman is correct we are about to have inflation and in a big way. If inflation is always a monetary event then the same should apply to deflation and since dollars are (temporarily) scarce what we see appears to be deflation; but the money supply has been hugely increased. Currently that money is not in circulation, but when it comes into circulation (and it will if they have to literally drop it from helicopters) watch what happens to prices. It may not cure the economy but it will surely cause prices to rise. When that money gains traction in the economy which is almost always delayed by six months to a year I don't think many will be talking about deflation any more.

The "powers that be" are determined that deflation will not happen here again. I wouldn't bet against them.

P.