Quote from: Cinnamon Cayenne on March 25, 2012, 11:05:28 PM

Perhaps I have been misled.

I was under the impression that "inflation" and "deflation" referred not to an increase or decrease in the size of the monetary supply, but rather to an increase or decrease in the ratio of money to goods.

That is, if the economy and the money supply are both growing, it isn't "inflation" - that for it to be "inflation" requires money to be created faster than the valuable things upon which the money might be spent.

That's a common error, perpetuated by poor news reporting by people who, themselves, don't understand economics.

True deflation or inflation are in increase or decrease of the overall supply of the monetary unit in circulation relative to the overall size of the economy that employs that unit. It comes down to the law of supply & demand, if the economy doubles in size; and therefore there are twice as much in goods and services, while the monetary base remains exactly the same, then we can assume the relative trade value of that monetary trade unit to double. Said another way, the value of the dollar goes up, so the prices of those same goods go down.

The same is also true in reverse, if an economy halves it's economic productivity while the currency base remains the same, prices double because the value of the currency has halved. This would be a 100% inflationary event, which would be catastrophic.

However, while a doubling of an economy would be equally disruptive, it's hard to argue that it would be catastrophic in nature, because an economy can only double if the economy can manage a doubling, otherwise other economic forces will delay that same growth. Resulting in a slower (but never negative) growth rate. This is what the bitcoin economy experienced last year, for the economy grew in size so fast as to outpace the growth in the monetary base.