Financial writer Ed Bugos has recently authored Memo to Richard Russell: On the Margin Baby. Bugos refutes theory that has been advanced by Russell and others, that money is becoming scarcer and that the Fed is fighting deflation. His analysis is based on Mises theory of the purchasing power of money as elaborated in The Theory of Money and Credit, and Human Action.
We’ve argued in prior articles that falling prices aren’t deflation unless they are caused by a contraction in money. Prices move up and down for many real reasons unrelated to monetary policy; inflation is a monetary phenomenon. The Internet and Wal-Mart are not deflationary forces; Japan is not experiencing deflation. The former are productive market forces, and the latter is a currency issue. There is nothing wrong with falling prices if they are not influenced by changes in money; it is the achievement of capitalism that it produces a greater amount of desired goods at increasingly affordable prices. This doesn’t mean that money is becoming scarcer as Russell implies in his definition of inflation/deflation (discussed further below).
