urbanrealtor, rich can present the case much better than I can, but the basic argument on why Krugman is wrong to dismiss inflation is that although some deflation is what’s happening now, the actions the govt is taking will lead to future inflation.
Recall home prices in 2000-2007? Based solely on what was actually happening at the time, you could justify an argument that home prices only go up, and any amount of lending against home prices was good. You had to go one layer deeper to diagnose and underlying over-extension of credit and an inevitable pullback.
In the same way, the govt’s vast expansion of credit and spending may look – and even actually be – just right to offset current contraction in spending elsewhere, but that ignores the simple fact that, once the govt starts programs that spend a lot of money, or that allow other people to easily spend a lot, then the govt cannot be stopped.
Let’s suppose you discovered that heroin could reduce the duration of a patient’s measles by 5 days. Prescribing it might seem good, if you allowed yourself to forget the addictive properties of the heroin.
It goes deeper than this. Inflation brings with it a transfer of wealth from savers to borrowers. We all understand that this transfer could make life a lot easier for borrowers, and the suspicion is that this is a political goal of Krugman and many others. Inflation may not be an unlikely and incidental and undesired consequence of current govt easy money policy – it may be an unspoken goal.
