Inflation and deflation are amazingly easy to define, incredibly difficult to predict in a free market and incredibly easy in a command controlled one and almost impossible to measure in either.
Put simply, inflation is an increase in the money supply, relative to itself. It is generally understood to be rising prices, but this is incorrect.
Deflation is the opposite - a decrease in the money supply, relative to itself. it is generally understood to be lowering prices, but this is incorrect.
Price changes are a symptom of inflation/deflation.
In a free market, money is anything that people use as a medium of exchange and this will alter daily in both type and quantity as and when people require it. If traders run out of gold, they'll use silver, if they run out of silver, they'll use oil if they run out of oil they'll use peppermint coughdrops......a medium of exchange is instantly thrown up by market forces and instantly removed by those same forces as and when required.
In a command economy with a fraudulent banking system such as we currently have, the money supply is impossible to determine. High street banks routinely pretend to have more money than they really do (they call this money creation, ho ho) which makes the figure impossible to determine from that point of view.
What we do have is a vague idea is the amount of printed and coined fiat money that there is - roughly £50 bn in the UK. The real question from the point of view of inflation or deflation of course is this - do market participants make their valuation as if that is all the money that there is, or do they think that there are a lot more pounds knocking about than there really are?
People accept numbers on a screen as payment, they accept headed paper with a bank logo and some numbers on it as payment. People accept credit cards and debit cards as payment. Why do they do this?
Well from a brief straw poll of a few dozen people on the high street, because they think that real money is behind the bank logo, "real" money is behind that headed paper. In other words, they price pretend money as "real" money. "Real" money being fiat currency in the popular mind.
Here is the kicker though - pretend money doesn't cost the same as real money. Not by a long shot. Vague promises are pretty cheap and stationary costs very little. However, it IS money, of a sort. Money is anything that people will use as a medium of exchange. The trouble with this mehod is that people are only accepting copies, knock offs, lies and the trouble with lying in this manner is that you have to keep doing it. That piece of paper that was flashed at some sucker with an imaginary "mortgage" had better work tomorrow, and the next day, and the day after, or he's going to stop working so hard to make his "repayments."
Eventually, the bankers might have to come good on their promises.
Even leaving aside this fraudulent aspect of banking and looking at a straight fractional reserve system we have the problem of promising the same item to many people. The value of that one item will be eroded because in the popular imagination there will seem to be many more of them than there really are. This means that when it's working a fractional reserve system will both appear inflationary and be deflationary all at the same time.
When it stops working, the opposite will occur. There will appear to be deflation but actually there will be either static monetary growth or inflation.
Eh? How come?
Using a real object is again the way to explain this, I think. If I have 1 piano and record it as belonging to 15 people and they all believe me, they will all act as if they have a piano. The human actions that result from mistaken belief - 15 people booking concerts, recording studio time, buying piano varnish, hiring piano tuners and so on. This sends signals to the market that there are 15 pianos in existence and so more human actions will follow - the concert hall owner will print tickets, have the place cleaned and that will result in even more actions, impossible to determine and very difficult to predict.
So...what happens if two people come for their piano at once and the warehouse banker is caught out? Well, he is ruined...unless....he can get another piano from somewhere. Now we have doubled the actual piano supply. The piano supply has inflated. But, and this is important - he's either had to have it made or bought it from elsewhere. This has a cost and gives out yet another set of signals.
What happens if all 15 people arrive for "their" piano and only 10 of them can be provided with a newly made one?
The banker goes out of business, the piano supply has actually increased by 10 and 4 people have lost an illusion. (The original piano was also given out.) Pianos will be swiftly repriced by the market to match their newly inflated amount. 4 people will need to either get another piano from somewhere or give up, with resultant loss of human actions that were based on a mistaken idea.
Replacing banker lies with fiat currency is inflationary.
A promise to provide the same item to multiple people doesn't create more of that item. Pictures of an item do not create more of that item. Plausible words delivered by a smiling man in a good suit do not create more of an item. Account statements claiming that there are more of an item than there really are do not create more of an item.
Making good on those misrepresentations, however, does create more of that item.
Not replacing banker lies with fiat currency isn't deflationary.
It's just the death of a delusion, the lie revealed. There were £50 bn, there still are £50 bn. Nothing has happened, nothing has changed, but peoples perception has altered to meet reality. They will act differently, that's for sure.
Velocity of money?
Doesn't mean anything, only known or perceived amount does. Velocity within the banking system is merely a measure of mispricing and mistake.
To conclude, the fiat/fractional system is an economic nightmare, whether the bankers get away with it or they get caught out. While it operates, no one has any real idea what anything is worth. Market signals are nearly useless. This is a bit of a problem because we've been on such a system for nearly 80 years.
80 years of malinvestment. 80 years of mispricing. 80 years of doing the wrong jobs in the wrong areas.
Think about what that might mean is here that shouldn't be and isn't here that should.