Debunking the Inflation Myth?

In his column in this morning's NYT, Paul Krugman argues that worries about inflation, in both the short and medium term, are simply wrong.

First, he says, much of the increase in money supply is simply being held as reserves by banks; it is not being lent. In other words

. . . these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

Second, fears that government will try to inflate its way out of debt are, he says, unfounded, and yet

. . . modern examples are lacking. Over the past two decades, Belgium, Canada and, of course, Japan have all gone through episodes when debt exceeded 100 percent of G.D.P. And the United States itself emerged from World War II with debt exceeding 120 percent of G.D.P. In none of these cases did governments resort to inflation to resolve their problems.

For Krugman, inflationary fears are much more political than economic in origin. He notes that government debt caused little concern when it was the result of tax cuts for the rich. It is, he notes, only when debt is the result of rescuing the economy and assisting the vulnerable that inflation fears really gain traction.