The argument is that the massive liquidity creation by the worlds central banks is going to lead to inflation. The rebuttal is that there is so much debt weighing on the system that no amount of monetary inflation will be able to keep up with the deflationary forces. The banks aren't lending so all this liquidity can't find its way into the economy the deflationists claim.
I would tend to agree that the banks aren't going to be lending at least not at the insane level we saw a couple of years ago. I'm not so sure the liquidity can't find it's way eventually into the economy.
The government is spreading that liquidity around at a feverish pace. That would certainly be one path to get liquidity into the economy.
The other is a bit more obscure. We know the Fed is pumping trillions into the banking system. So if one was a bank would you rather allocate your capital towards risky loans in a weak economic environment where the chance of default is elevated or would you rather push that money into depressed assets, specifically the stock market?
It seems obvious the Fed is willing and probably motivated to create asset inflation in loo of real economic growth. Sure its another phony economy just like the one we had from 02 to 07 but it's the next best thing if aggregate demand can't actually be stimulated by simply printing money.
The Fed is hoping that eventually asset inflation will result in an real rebound in the economy. Unfortunately we've already traveled that road and what we ended up with was a credit bubble and soaring energy prices.
I suspect the end result isn't going to be any different this time than last except the collapse when it comes will probably be even larger as the monetary stimulus is multiples bigger this time.