I follow Mish's blog and have read his stuff for a couple of years. He knows what he is talking about, but I believe in this case he's wrong. He's too focused on credit expansion as the foundation of his deflation argument; most of the credit he's talking about was internal to the banking system. Yes, that credit destructing is causing merry havoc in the economy, but was never part of the economy to begin with - it was internal to the banking system. He is also a bit too quick to chastise others for looking at prices as "Keynesian fallacy", yet trots out stock and real estate prices as proof of deflation when it suits him.
I challenged him a couple of months ago about his claim to be an Austrian, since he all but ignores money supply growth in his analysis - which is an Austrian basic. He still hasn't responded to me, but he did address the idea recently in one of his blog posts. He claims that the credit destruction vastly overweights the money supply growth, so M0 and M1 are meaningless to the arguement. I'm not sure what economics camp he's in, but he's not an Austrian or a Keynesian. More like some blend of both or some new beast entirely: an economist who thinks only in terms of credit.
Anyway, I know you were asking Joechip, but I wanted to comment that I believe we're in both an inflationary and pseudo-deflationary environment right now. We have explosive money growth and massive credit contraction. We have decreasing real estate, stock and energy prices with increasing food, entertainment (including cable) and drug prices. I see the decreasing value as the result of a bubble in real estate, stocks and engery returing to the mean. I see the increase in prices for food, entertainment and drugs as the beginnings of real inflation (too many dollars chasing too few goods.) I see the growth in the money supply from the Fed, which to say is historic and record-breaking doesn't do the movement justice, as a much more permanent condition than the inter- and intra-bank credit correction. For example: On the one hand, you just had a salary reduction of $5,000 a year and on the other hand, your credit card company just dropped your limit $5,000. Which has a more long term impact? Part of the reason we're not seeing 100% inflation right now is that the newly printed money is currently sitting in banks and improving their balance sheets instead of running around the economy. It'll have to come out into the economy soon, and then we'll really see who was right - the inflationists or the deflationists.
Just my buck-fifty.