Inflation/Deflation

It seems there is a struggle in the economy between inflation and deflation. The Fed has created massive amounts of money, but most of that is sitting as excessive reserves with the banks. It is keeping us from massive price inflation. The economy is trying to get rid of all of the bad investments that happened during the previous boom, but the government is not letting it happen. There is a struggle between recession/depression and high price inflation (say 10% or more). The Fed can choose the latter at any time. It can essentially force the banks to stop holding excess reserves. The Fed can also buy any assets of its choosing.

In a speech that Bernanke made several years ago that earned him the nickname “Helicopter Ben”, he said that the Fed can prevent deflation/depression at any time by credibly threatening to create massive amounts of money. He is correct on this point. The Fed can cause massive inflation (monetary or price) at any time. Right now it is trying to walk a tight rope, but they are running out of room. We will eventually get a depression. Hopefully the Fed will choose that course soon. If not, we will get really high price inflation, and then we will get a depression.