For all those inflation bugs- IS BOOMING MONEY SUPPLY REALLY INFLATIONARY? Not when you are in a liquidity trap, which is where we are. The problem with the Fed's monetary experiment is that the money supply boost is still not circulating through the economy but rather sitting on bank balance sheets. At least there's no delinquency risk with net free reserves. Paul Krugman uses some great historical examples in his Monday column in the NYT (Stay the Course). Between 1929 and 1939, the monetary base doubled (and the dollar devalued) and yet prices deflated 19%. In fact, despite seven years of New Deal stimulus and rampant FDR incursion into the economy, the 1930s ended with the unemployment rate at 15%, the CPI declining at a 2% annual rate and the level of GDP still below its 1929 peak. Between 1997 and 2003, Japan's monetary base surged 85% â deflation pressures remained intact. We just do not believe it is still appreciated that when the economy slips into a deleveraging phase, which by its nature involves asset liquidation, debt repayment and rising private sector savings rates, it takes years before the economy makes the transition to the next up-cycle and only then with massive amounts of fiscal and monetary stimulus. From Braekfast with Dave, today.