Perhaps someone out there can clear this up for me. It seems to me that the actual money supply can increase dramatically, yet prices can remain stagnant or even go down for long periods of time depending on how we behave with the "new" money. For example, if banks have money to lend, but are too scared to lend or if investors are too hesitant to borrow it would seem as if the money would just "sit". Also, if consumers "horded" money and spent only on their absolute necessities (drying demand) wouldn't prices be kept in check or even drop? I almost feel as if it is taken for granted that an increase in money supply equals inflation, when it would appear it should depend on the psychology/behavior of lenders, borrowers and savers that would determine inflation vs. deflation. Austrian economics definitions of inflation and deflation are solely based on the increase/contraction of the money supply making it appear that the "behavioral" aspect is already built-in.
The Austrian explanation of why prices rise and fall has always been based on the supply and the demand for money. In your case where consumers hoard money or where banks are afraid to lend money (the classical case of a "liquidity trap"), the demand for money is very high, due to all the consumers and financial institutions that want to hold on to the money. Because of this, the price of money rises (or what is commonly called "deflation").
Monetarists use a spin off of this idea through their equation "MV=PQ," or money supply times velocity equals price level times output. "MV=PQ" or "MV=PY" are both equations that essentially describe the supply and demand of/for money, but in different, slightly more complicated, and more mathematically quantifiable terms.
I think you and others might be confused a bit about how Austrians use the terms "inflation" and "deflation" differently from other economists and popular commentators. It is purely a matter of historical difference that Austrians use the term "inflation" to describe "monetary expansion" and "deflation" to describe "monetary contraction" whereas mainstream economists use "inflation" to describe "rising price level" and "deflation" to describe "falling price level." So when an Austrian school economist says that there is "inflation" while a mainstream economist says that there is "deflation," both can be right at the same time, as one is saying that the money supply is expanding while the other is saying that prices are dropping. It is completely feasible that both happen at the same time, since demand can be rising more quickly than supply, creating a falling price level.
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freefred:Perhaps someone out there can clear this up for me. It seems to me that the actual money supply can increase dramatically, yet prices can remain stagnant or even go down for long periods of time depending on how we behave with the "new" money.
At some point, all that money sitting in the reserve accounts is going to make it's way into the economy. The Austrians offer no general prescription for the onset of rampant inflation following an increase in money supply, only a general maxim.
freefred:Also, if consumers "horded" money and spent only on their absolute necessities (drying demand) wouldn't prices be kept in check or even drop?
Again, at some point in time, that money (brought about by the inflation) will make its way into the economy, where it will cause the eventual misallocations of resources, asset bubbles, malinvestments, price inflation, etc. In relative terms, had the Central Bank failed to increase MS, individuals would've been even more thrifty, and prices should fall even further as evidence by their revealed preference to hold money rather than to consume it.
So sure, prices might fall nominally, but you need to take the real into account, too. If prices fall 10% after MS increases, but would've fallen 25% without the MS+, then we're certainly experiencing relative inflation.
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David Z
"The issue is always the same, the government or the market. There is no third solution."
If the velocity of money remains constant, then price inflation is the same rate as money supply inflation.
If the velocity of money increases/decreases, then price inflation is greater/lower than the rate of money supply inflation.
The velocity of money is relatively constant, except during a hyperinflationary collapse. During hyperinflation, people rush to immediately spend their money before it loses its value, making the velocity of money go to infinity.
Also, if the economy grows, then the rate of price inflation is lower than the rate of money supply inflation.
If the economy shrinks, then the rate of price inflation is greater than the rate of money supply inflation.
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