The Great Inflation-Deflation Debate

Nate forces my hand by kicking it off on his own blog:

It appears to me that there seems to be a bit of confusion out there about what the money supply is doing.  Is it growing?  is it shrinking?  Inflation?  Deflation?  Stagflation?   Obviously I am a hyper-inflationist…   Our buddy Vox is a deflationist.  So what gives?  Does it matter?

Well… if we’re going to talk about this we’re going to have to establish some kind of basic vocabulary.  For example… what is money?  I know… you’re thinking dollar bills and coins.  Yes and no.  Money is an exchange medium that is used to complete a transaction.  The critical characteristic of money is that it does not require any additional transactions to satisfy the terms of the exchange.  You got your money… and that’s good enough.  Lets look at gold for example.  Gold is money.  It always has been money.  You want some of my cattle… you give me a small amount of gold… and we’re done.  Modern cash is similar.  You give me cash.. I give you a cow or two… we’re done.  Cash is money.

What about debit cards?  I swipe your debit card… I give you cows…  we’re not done.  Your bank has to send money to my bank.  That’s an additional transaction.  Debit cards aren’t money.   Same for checks.  Checks aren’t money either.  They are IOUs for money.

Go to his place.  Read the whole thing.  If it doesn’t make sense, read it again.  Grok it in its fullness.  I will respond here within one week.