Northern Trust economist Paul Kasriel, who is usually right, concludes that you should now worry a lot more about inflation than deflation. Paul thus sides with John Hussman, Niall Ferguson, and others--and against Paul Krugman, who thinks all this talk of inflation is just Republican fear-mongering.
Kasriel's forecast, comfortingly, calls for only 3%-4% inflation for the next few years. Compared to the hyper-inflation that we and others are worried about, this would be a dream scenario.
Paul bases his conclusion on both secular (long-term) and cyclical (economic cycle) factors, some of which are arcane. You can download the full report here. Here's a snapshot of the key points:
I will not keep you in suspense. I believe that the greater risk for the global economy in general and the U.S. economy in particular is inflation, not deflation. I arrive at this conclusion both on secular and cyclical grounds.
Real interest rates are low, which will encourage inflation, just as they did in the 1970s.
Productivity growth, which is deflationary, is now falling.
The growth of Asia, which has been very deflationary, is likely to slow as a percentage of the world economy:
US debt is expected to explode as a percentage of GDP, even according to Obama's OMB estimates (which show a ludicrously flat peak. Gaze back over the earlier years and ask yourself what chance there is that THAT will happen). The Fed will be under pressure to inflate its way out of the problem, and it will err on the side of doing so.
The money supply is growing rapidly. "Velocity" (the speed with which this money flows throughout the economy) is currently low, which is holding inflation down. But if the economy picks up, so will velocity. Krugman shows that changes in the money supply correlated closely to the inflation and deflation of the 1930s. He also rejects the hypothesis that the "output gap" will restrain inflation, again by looking at the 1930s.
Bottom Line: Kasriel expects inflation of 3%-4% per year for the next couple of years.