On Sat, 29 Nov 2008 22:17:09 -0800 (PST), RichD wrote: >>Supposedly, we are now descending experiencing deflation,. >>which causes, or results from, recession. >> >>My question is: where did the money go? We have seen >>major inflation over the last 5 years (housing and commodities), >>which is, as we know, a monetary phenomenon - the Fed has run >>the printing press full blast, with their 'easy money' policy. >> >>Now, bust follows boom, and prices fall... but the money is still >>out there, yes/no? Demand should be constant, with boatloads >>of bux chasing goods.... where are all the dollars? Hw can >>general price level drop? Say: "velocity" The economy is an ongoing process, so what matters is not the quantity of money but that quantity multiplied by the number of times it turns over in a given time period -- its velocity. As the classic equation puts it, MV=PQ: M (the quantity of money) times V (velocity, the number of times it turns over) = P (price of goods) times Q (quantity of goods produced) Thus, it is easy to see that when M stays even if V plunges then either prices must fall (deflation) or the quantity of goods produced must fall (recession) or both. V will fall if people, banks and businesses get scared of lending money (the bank or other borrower may fail) and/or think they have to pile up cash holdings rather than spend them to get through hard times. Then they proverbially put their money in their mattresses, so it stops changing hands, so V falls. If you want to see a picture of V plunging, take a look: http://research.stlouisfed.org/fred2/series/MULT?cid=25 That's what produced the Great Depression with its 25% deflation, and 25% unemployment, because the Fed didn't counter it by increasing M. If you want to see a picture of the Fed, after having learned that lesson, increasing M to counter such a decline in V, take a look: http://research.stlouisfed.org/fred2/series/BOGAMBNS?cid=124 The Fed is *literally* rolling out the printing presses right now-- it just imported new currency printing presses from Switzerland to boost its money-printing capacity and tie M to an upward rocket.