I think the debt/deficit rabble rousing is just political posturing and that very little will come of it. (We will someday have to clean up our act, but I’m convinced that politicians won’t be motivated to do this until AFTER a govt debt crisis has begun).
I admit that the above paragraph is speculation and could be wrong. However, I don’t think that matters. Even if I am wrong, and the politicians accidentally initiate a period of deflation, they will just repeat the playbook they used in 2009. To the extent that doesn’t work, they will add some new plays to the playbook until something does.
So there could be a bout of deflation but it’s been shown that a sufficiently aggressive Fed can turn that around. 2008-9 was a perfect storm for deflation: bursting of the biggest private sector debt bubble ever, a horrific synchronized global downturn, a market liquidity crisis, a commodity crash, and a flight into the dollar. And yet the CPI declined, mildly, for 6 months. I doubt very much that the same magnitude of deflationary pressures will ever hit all at once again — but even if they do, the Fed and the govt can just step up the intervention even more aggressively.
If you haven’t read it, the article to the upper right called “Fundamental Investors Should Fear Inflation, Not Deflation” discusses this in quite a bit more depth. But that’s the idea. Short term, things can go anywhere. If something does come of the anti-deficit posturing, that could potentially cause another dip into disinflation/deflation for a bit. But long term the trend will be toward inflation, at least until we are forced by our foreign creditors to clean up our act (but that will mean the inflation already happened).
