Falling Asset Prices Are Not Deflation
We always stress that the great financial crisis has indeed left the economy with what one might term a 'deflationary undertow'. To the extent that households try to deleverage and are paying back debt and to the extent that banks refuse to expand credit concurrently, there is a theoretical possibility that the money supply might one day decline. It must also be stressed that this is highly hypothetical at this stage, as it has simply not happened yet.
On the contrary, the Fed has actively pumped up the money supply at a truly astonishing pace. See for yourself:
Broad US money supply TMS-2 – there's no deflation in sight so far – via Michael Pollaro – click image for better resolution.
Moreover, falling prices as such are not evidence of 'deflation', including falling asset prices. This is however what 'Barron's' asserts in a recent article, whose author muses over whether the 'Fed is losing the fight against deflation'. Say what? According to Barron's:
