Imagine a husband and wife with a bright child who are saving to send the boy to the best prep school, then Princeton, then, hopefully, Harvard or Yale Law, so the boy can realize his dream of being a great lawyer and perhaps one day sitting on the Supreme Court.
Krugman is recommending that the Fed goose the money supply to cause a general fear of inflation, so that couple will run and get their money out of the bank and start spending it, because, if they don't, their own government will start destroying the value of their savings.
This is Weimar economics.
As for inflation, are not the prices of gold, silver, oil and other commodities flashing signals that it is on the way?
In denouncing Bernanke, even the Chinese are not all wrong. They have followed the monetary policy we created at Bretton Woods in 1944, where we tied the dollar to gold at $35 an ounce, while other nations tied their currencies to the dollar at fixed rates of exchange.
China is being denounced for manipulating its currency when Beijing is adhering to a strict dollar-renminbi exchange rate, while our Fed is manipulating the dollar price to seek competitive advantage.
The other Chinese complaint is that they lent us trillions to buy Chinese goods and now we are robbing them by depreciating the dollar-denominated Treasury bonds they accepted in return for their goods.
Pay back your banker in Monopoly money, and you will find you are soon unable to borrow from anyone anywhere.
In four years, the American people have delivered three straight votes of no confidence in the U.S. government. The Fed, however, retains a confidence that it does not deserve, when one considers that, when it was created in 1913, a $20 bill could be exchanged for a $20 gold piece.
Today, it takes seventy $20 bills to buy a $20 gold piece, which means the dollar can buy in 2010 what you could get for 2 pennies in 1910. Quite a record for a central bank set up to protect the dollar.
If Bernanke's inflation does not generate growth, confidence in the Fed will also vanish. Then a crisis of capitalism will be at hand.
Historians will not deal kindly with the men who traded the horse of U.S. economic nationalism for the rabbit of the Global Economy.