Perhaps we are on the same page. To clarify further, I'm defining inflation as an increase in the cost of living as measured by the CPI. I see no evidence that the cost of living will fall. If you get into the details of the recent CPI reports, the rate of CPI increase is increasing. And it's not just energy and food. Even rent increases are accelerating.

Life is not a simple straight line. Undoubtedly, we will see slowing inflation at times, but the trend is higher. I see nothing in the tea leaves to change the current trend (a body in motion). Tip spreads over the past five years show inflation expectations have remained steady at just over 2%. The reality is that inflation over the past five years has been closer to 3% – a 50% disparity. IMO, tips & treasuries are NOT trading on inflation expectations (or more accurately CPI inflation expectations). More likely, U.S. government securities are a risk averse haven. Wealth concentration further exagerates the flight to safety. Bernanke is trying to shake that risk averse capital out of safe harbors via negative real interest rates. So far, the Fed's plan has resulted in increased commodity costs and lower federal government borrowing costs. If that's not inflationary, I don't know what is. Personally, I don't see hyperinflation. Unfortunately, I do see the cost of living exceeding wage growth.

Intermediate and long dated corporate, municipal and mortgage rates are on the rise. Beyond the higher rates, lending terms are also tightening. Is this fear of inflation or fear of default? In any event, it seems likely to increase the cost of living to a typical American family.

One final tidbit that keeps me up at night. For well more than a decade, MZM has increased at close to 9% against nominal GDP growth of less than 6%. That's a huge slug of excess $$money$$. What are the odds that excess money benignly stays in apparently "free wealth" creating assets like stocks and bonds? Are 3 billion Asians going to happily let their savings sit in wall street clap trap investments such as mortgages? I suspect they will come to the conclusion that their money is better spent for their own wants and needs.

The inflationary U.S. dollars have already been created. I fear the the velocity of those U.S. dollars will increase.

1. Easy money is inflationary.
2. This eventually leads to excessive credit and malinvestment and then to credit revulsion.

I assume you believe the central banks will continue to provide easy money as a panacea to the downturn due to credit revulsion. The question is whether they will succeed in relating the economy.

You seem to believe they will succeed and this combined with past easy money will lead to hyperinflation. I don’t think they will succeed because the level of credit revulsion is too great and the money multiplier has really cratered as a result.

Inflation or deflation? It’s the constant debate.

See my post on which previous crisis is the best model for this downturn:

http://www.creditwritedowns.com/2008/06/credit-deflation-and-japanese-problem.html

I share your bearish views on our future growth, but I don’t agree that the slow growth will be the result of bank write downs.

So much of the credit banks issue is excessive and unproductive. During the housing bubble and the com bubble, I would argue that much of the credit issued was even counter-productive. In any event, real growth is quite possible with tighter credit. Just look at Microsoft or Google. Innovation and productivity are the true sources of wealth creation. Senseless credit creation is indeed senseless.

Going forward, I fear inflation not deflation. Not only because of future money creation, but because of all the past excessive money creation. I think inflation is baked in the cake and sitting in overseas pantries. Negative real rates and a weak dollar just add to inflation pressures.

Bernanke and the finance world view spreadsheet growth as output. I don’t. I’m quite sure the bottom four quintiles don’t feel wealthier despite the huge increases in credit they received. Falling real wages do not justify higher housing prices.

Here’s some food for thought. The 1970s were considered inflationary despite the fact that stocks and bonds declined. In the early 1970s, even tangible assets slumped. Today seems very similar, yet the majority fear deflation. Remember the overpriced nifty fifty? It looks like deja vu all over again.

A return to the mean is NOT deflation in my book. Attempts to stop this return to the mean will surely be inflationary – at least on a CPI basis.