Merle Hazard: "Will we Become Zimbabwe or will we be Japan?"

Is the United States is about to fall into a deflationary spiral or is it on the brink of run-away inflation? Allan Meltzer has looked at the near-zero interest rates, the blow up of excess bank reserves, and the more than doubling of the Fed's balance sheet and is certain that the United States is set to repeat its 1970's experience with inflation. Paul Krugman, on the other hand, takes a look at the large negative output gap and declining wages and sees deflation as a more likely threat. What are we to make of this debate? As noted by Mark Thoma and Martin Feldstein, the answer is that both outcomes are possible; it is just a question of timing. In the near term there is no doubt that the clear and present danger is deflation as domestic demand continues to collapse. At the same time, the Fed's vigorous (if somewhat haphazard) monetary expansion intended to stabilize nominal spending and prevent deflation will be very difficult to reverse once the recovery begins. If so, inflation will become a major problem. So brace yourself for the possibility of deflation in the near term, but plan in the mid term for the specter of inflation.

For further clarity on these issues I present Mr. Merle Hazard and his sidekick Mr. Bretton Wood: