deflation; where did the money go?

That's because they are sooooo different. But it does matter what you do with the borrowed funds.

The problem is that you and a lot of other people have been brainwashed into thinking that inflation is evil. It is probably essential at this point.

Sir Keynes is very much in vogue and it is because he got a lot of things absolutely right. But he did not have the benefit of true fiat money at his disposal. We do.

So a change in either velocity or quantity will change the function.

So if you inject money then this arrests the fall.

Yep.

But if you print up some new money it causes inflation and the money starts coming out of the mattress. Because if it doesn't it is going to lose value.

Yep. That was a big part of it.

Yep. It's essentially true.

Printing money and giving to to the banks (the rich) will not do anything but make the rich richer. The created money must be blown into the bottom of the economy as a demand side stimulus and it will cause inflation and that will make the money come out of the mattress.

Oh, if I have tons of debts it's a good thing. If I'm a debitor it's a catastroph. The problem is that people have been brainwashed into thinking that deflation is evil. A deflation of 1 or 2% per year is not evil at all; it does not prevent people from spending on what they really need, the period 1870-1890 wasn't that bad in general since the purchasing power largelly raised in the USA. Salaries drop by about 1% per year and prices nearly by 3% but the US GDP did not drop.

Now regarding the present situation I admit that if the government does not print money there will be more than a 1 or 2% annual deflation. But anyway whatever the government does with the money supply it will not cure the problem.

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You guys (monetarists) speak as if Fiat money was a marvellous invention that came into light in 1913 or so. Fiat money did exist even during the Roman empire when they started to put less silver into coins, the French used it during the revolution, the Americans during their own revolution, the Chinese, and always those systems finished in the gutter for the same reason. It was too easy or government to increase their spendings and distribute favours, just printing more money was enough. And of course at some point it loose all of its value. The present system will finish the same way for the same reason.

The present crisis was never supposed to happen if we take the monetarist point of view in, let say the year 2005. House prices were not supposed to be overvalued. Now the economy is in free fall and your 'solution' (increasing the liquidities) may just improve slightly the situation for some weeks or months in the year 2009, but it fails to take in account that money is supposed to be a medium between people who want to exchange hours of works and goods against other goods or hours of works. Earlier I gave an example where I would have falsified a note and add two zeros in order to get 20000 pints of milk or so, the misallocation of ressources and capital that follows, etc... Introducing new (false) notes to promiss 5 tractors when you have no way to create or deliver them for free, so adding other lies to the system in order to cool the minds and lead everybody to start back to work may work for sometimes but eventually the whole system has to blow up. Many work for stuff for which there is an artificial demand, many still believe that they are richer than they are and spend on stuff they shouldn't, or let say promiss hours of work that they can't deliver to someone else.

You seem to not be aware of what those words mean.

It is.

Deflation creates a system in which the rich can remain totally idle and not invest in anything at all and remain rich. That is stagnation.

Rubbish. It matters what is done with the money.