It's still fractional reserve banking. It doesn't matter *how* the accounting is done, only that the bank is still lending out something that was deposited with it. And again, it doesn't matter what banks do with money *after* its creation. They only amplify the money supply that the central bank creates in the first place.

My strict usage of "inflation" and "deflation" are in fact *contrary* to what nearly all economics textbooks say. Most economics texts that discuss inflation to any degree are Keynesian in basis. I, however, go by the true definition, i.e. Milton Friedman pointing out that inflation is purely a monetary phenomenon. Look, it doesn't matter even if Kudlow says that trade and productivity are "deflationary": if that's how he terms it, he's wrong. He's said silly things before about liquidity, and Mises.org has called him on it.

By your definition, the jewelry industry, or at least one of its members, had some pretty big deflation this last weekend. Odds are pretty good that my fiancee won't read this, so I can mention something I have for her. Guys are worried about if they're "big enough," and also if jewelry is big enough. Not that my fiancee wants anything beyond my love, but I became dissatisfied with a pendant that I bought the previous weekend. So, I returned it this Saturday and exchanged it for one with exactly twice the carats. The first one cost $x, and the bigger one cost exactly $2x. This past weekend, though, the first was reduced to $.75X, and the bigger was reduced to $1.5x (which I didn't even know until they rang me up in the exchange and quoted me half of what I was expecting, what a happy surprise). Did Kay's suddenly experience tremendous deflation? Of course not. So I caution you again, don't confuse inflation with supply and demand.

As I wrote before, baskets of goods and services are ridiculous measures of money's value. You need to judge inflation by fungible things, like gold, crude oil, and copper. They won't be exact measures, because there is still supply and demand at work, but as I pointed out with crude oil prices, the price jumps are far more than what supply and demand can explain. The same holds true for copper and other commodities with industrial uses: China's and India's industrialization cannot explain the surge in dollar-denominated prices. Look at gold: the increase in its value cannot possibly be because it's suddenly so much more in demand, all else being equal. Gold's value in other currencies disproves that. It's because dollars used to purchase gold have lesser and lesser value.

As far as Goodheart, I took a brief look at his paper and had to laugh. Like Roche, and like Greenspan (who I blasted last night on my blog), Goodheart is saying stuff as if it were a new revelation, when it's been obvious for decades! Case in point, his footnote at the bottom of page 3:

"According to pure monetary theory, if the
quantity of money in circulation is increased and other things remain the same, the value of
money must fall.... But its applicability to a given situation depends upon a correct understanding of what things are to be regarded as money..."

Austrians have known that for decades, because we (I include myself even though I'm only 95% Austrian) know that money is not limited to any single thing. Money is merely a medium of exchange, a tool, and fundamentally it's only information. Remember what I said before, that if a Scrooge McDuck decided to hoard almost all the gold, then the rest of us would simply find something else to use as money. A tool cannot be too easy to obtain if it's to have any value in acquiring (it can still have value in momentary utility), but it's useful only if it's available in sufficient quantities.

Economists have a bad tendency to make theories of money and banking, and other theories, far more complicated than they need to be. It's like Christians arguing about trivial things like how to cross themselves (or whether to) or if Christ really is mysticaly present in the Eucharist. Economists reinvent the wheel not because they feel "they're right," but because presenting something rehashed is key to sustaining their livelihoods: they get to sit around "theorizing," instead of doing actual productive things like analyzing. I gave a friend an explanation of Japan's deflation in a few paragraphs that was far more clear than Bernanke's convoluted non-explanation explanation a few years back. The difference is that I'm not a professional economist, and my time spent explaining is limited and therefore valuable.