I've heard the deflationist argue that we can't have inflation because credit is contracting. Their stance is that since consumers aren't borrowing there is no way for liquidity to get into the system.
I've got to say that anyone who thinks credit is contracting is grossly missing the big picture.
Surely the consumer is trying to deleverage, but the slack is more than being made up for by governments. The US has doubled it's national debt to over 12 trillion in just the last few years. If you take into account unfunded liabilities estimates are around 100 trillion.
Folks that is not debt contraction, that's debt expansion on an astronomical level. What is the government doing with all that money? They are spending, spending, spending in the vain attempt to spend our way out of this recession. Anyone who thinks this money isn't getting into the economy hasn't looked at the price of gasoline lately.
The excesses have moved from Main street & Wall Street to Washington. So the question now is who is going to bail out Washington when the s**t hits the fan? ...And it will eventually hit the fan.
Unfortunately the same people that bailed out the financial system are going to bail out the government when everything starts to go sideways. Those people are the American taxpayer.
Here's what happens when Washington gets in trouble. They just turn on the printing presses and print money. That printing leads to inflation. So we the American taxpayer are going to pay for Washington's excesses when inflation starts to eat away at our purchasing power.
I dare say it's already starting, just go take a look at the aforementioned price of gasoline.