Indeed. The issue is that I wasn’t transparent in this post – my assumptions were barely even clear to me, let alone anyone else. I will try to be more explicit in the future.

I guess it depends on how you feel about future Fed action – I just can’t see them mopping things up quickly enough. I guess I just don’t think that the Fed will do what is required and I just believe that future inflation will be stronger than should be required.

Of course, I hope that my random, cynical, value judgments don’t come to pass.

But yes, I assume that this move is seen as consistent with the Fed’s inflation mandate, and that target hasn’t changed, so if required, the money will be mopped up at a later date.

With inflation still well below the minimum Fed inflation target(about 2%), I can’t see how moves that shift inflation slightly closer to that target are really unfair. People who hold nominal $US assets just lost their bet against the Fed’s credibility.

The fact that the US is pushing for deflation implies that there is some cost that must be realised in their economy – inflating their way out implies that they are shifting that burden onto the people they’ve borrowed off (assuming of course that nominal interest rates don’t also adjust – because if they did then this entire exercise would be pointless).

I don’t believe that the utilization of spare capacity will “make up the entire gap” – but I agree with you that it does imply that this solution is probably Kaldor-Hicks efficient. However, it still implies a transfer between the US and their debtors doesn’t it?