James Hamilton attempts to explain the theoretical aspects of both Greg Mankiw and himself; yet still lacks a bit in credibility on the spread of deflation being as large a threat as inflation. I would like to tell the interested Reader that this is not to suggest he proposes the impossible, and the equal great plausibility that he could be totally accurate. We are all still Guessing after centuries of intense study of the economy, and this does not bode well for the eventual survival of the human species–if the ecologists are Right; still, that is another discussion. I will try to explain my own position on Inflation and Deflation, which will obviously lead to confusion for the Readers.
Inflation/Deflation remains a function crippled by two exterior impacts which I like to call the Brush Fire effect, and the Revolver Trigger effect. The Brush Fire effect consists of previous accumulation of nonproductive wealth accumulation; this coming from potential prior monetary policy leading to excess stocks of Cash, and parasitic profits coming from artificial middleman costs which serve no real economic transference or productive function. The Revolver Trigger effect consists of the statement that there are multiple propellants of Inflation within every economy, and a resistance to these propellants before they are allowed free rein; a certain level of pressure must be applied to the Trigger before the sear slips and the Round fires. The only difference from the Revolver is that the cylinder spins of its own accord, and no one is sure which Round will fire at any time. It all means that no one quite understands which Round will fire as there are multiple sets of pressures applied to the Trigger at any given time, and the bullet fires from unknown origin to hit unknown target. The Brush which catches fire from the Round has unknown location, unknown levels of brush accumulation, and unknown dryness due to the brush’s distance from actual productive effort.
We know that Inflation can flare up anywhere exactly like a Brush fire, will find a abundance of fuel or a lack of same, and can explode into flame like a bomb or burn slowly like the coals of a campfire for decades; all dependent upon the level of fuel and dryness of the materials. The two basic methods to control a brush fire is to pour Water onto it, or build a moat of cleared area around it so that it lacks fuel. Pouring Money on deflation can forestall such deflation, but Money is actually in short supply–it is an Accounting thing–though the Fed makes it look easy; a secondary factor which should be discussed, but not here. Pouring Money on inflation accelerates the fire, only essentially diminishing the dryness condition necessary for the nonessential capital for productive purpose to brightly burn. Here is the trouble: Pouring Money on inflation will only cause a much greater fire, while building a moat against provision of further fuel will vastly increase deflationary effect; a minor discussion should be made about the width of the spout from which the Money is poured which always hits the entire economy. Now comes the Guessing Game of deciding if any Round of Inflation will fire, and if so, in what direction; and what is the condition of the brush capital it will impact, also as to amount and dryness of materials. What more need be said? lgl