Why Inflation is Good
Well, the economy as it is, is driven by credit. Debt drives this economy. That's just a fact of life at the moment. But what happens when credit dries up? Well, we'r seeing that unfold right now. The money supply without the Fed devaluing the currency, is dropping precipitously. Think about the money multiplier and how it works with bank reserves and the amount of money they can lend, or essentially, create out of thin air. For every dollar in deposits, they can lend, 9 more dollars, which essentially is created money, and an increase in the money supply. Well, right now, banks are hardly lending, even to each other. So, with banks hoarding more rather than lending more, the money supply either drops (because of hoarding), or, remain flat (which isn't happening).
There are more loans being defaulted and paid off than new loans to replace them. That means a drop in money supply according to that one metric. Add into the mix, falling asset prices across the board...commodities, equities, real estate...and all this means an even more precipitous drop in money supply. Not only that, but banks will have to write off $1 trillion plus, because their asset values are falling so much. Deflation with a severe sting.
If you take all these things into account, you should be able to understand why the Federal Reserve has had to make huge liquidity infusions into the economy, and had to re-capitalize the banks with hundreds of billions of dollars. Inflation truly is the least of our worries. In fact, inflation is one of the solutions to the problem to the vast losses of capital/liquidity in the economy.
Is it no wonder to you that the dollar has been rising since this crisis began? Two things, firstly, decreasing money supply (due to huge capital losses) and deflation. Secondly, the flight to risk-free government bonds. The Federal Reserve has plenty of room to inflate, and inflate they will, because if they don't, they will be held accountable for their inaction when a deflationary spiral sets. Luckily, we don't have to worry about that scenario because the Fed's are doing exactly what their supposed to do. We should all be thanking Bernanke for his stewardship at this time.
Lastly, it helps to have an education in economics. I'v found through my education, that 99% of the politicians, pundits, and commentators out there in the media, don't know what they'r talking about. Key among them, Rush Limbaugh, Sean Hannity, Glen Beck, and our favorite Libertarian, Ron Paul. None of these idiots have a background in economics, let alone read Maynard Keynes The General Theory of Employment, Interest, and Money, or Adam Smith's The Wealth of Nations, and yet claim to be free market champions. They don't know what a free market is!