Being a long time lurker of this site, I am tempted to reply to this “deflation/inflation” debt. My contribution:
All the discussion so far was more or less focusing on the total/aggregated money supply. In debt based money system as we are in US, for my reading, the problem comes in not because of total amount of debt or destruction of the debt, but how the debt was distributed across the entire society.
As Rich’s fine example of “helicoptering 1 million dollar to every one to inflating a way”, the current problem most stems from large portion of population, say homedebters, is indebt to a small number of rich or banks. Debt defaulting frees up reduces the claim to debtor’s income and helps re-vitalize the debtors’ capability to spend. Economy is a circulation system. It runs well when it circulates well. In this circulation system, the end-demand from workers and consumers are the major drive.
By allowing banks, with the help of Treasury, to trickling REO/short sells and trying every measure to keep homedebtors in unsustainable debt by giving temporary relieve on mortage rate will drag us along japan path for many years.
Certainly, there is big hard-to-predict factor: politics. The wind currently seems to sway towards to “less debt”. This certainly does not help to reflate. Political press is also on Fed reserve.
I have another more or less “incentive based” analysis. If the hypothesis that “the rich rules the US/world”. Fed gov and reserve must not inflate, unless the pain on the mass become too big to endure with higher and higher unemployment. Deflation favors those who have money and banks too: as we know banks have huge reserve (>1T). Those reserves are truly high power money which can be used to acquire assets when deflation and panic is in full force like Oct 2008 to Mar 2009.
