[AndrewWoo]

Despite a slowdown in the pace of decline in recent weeks, the downward forces in the US economy still look formidable. Unemployment is rising fast and industrial capacity use is at its lowest ever recorded level (series started in 1967). Commodity prices are low and wage growth is slowing sharply, with increasing reports of pay freezes and even cuts. All this points clearly to declining inflation, and even deflation if the economic downturn is prolonged.

Yet the policy response is a huge fiscal stimulus bringing a double digit fiscal deficit, combined with quantitative easing by the Federal Reserve, i.e. printing money. A few die-hard monetarists are already forecasting a surge in inflation within the next 18 months, while many economists are concerned about the long-term risks. So is the economy going to bring us deflation or is the government going to create inflation?