Krugman acknowledges in the last paragraph of his column that "we have a long-run budget problem, and we need to start laying the groundwork for a long-run solution. But when it comes to inflation, the only thing we have to fear is inflation fear itself."

Krugman is an able economist. He is also a fiercely partisan liberal. He is the gingham dog to Milton Friedman's calico cat. His column of today is slash and burn economics.

If there is any responsible economist who believes that the nation is on the verge of a hyperinflation, I do not know who it is, and Krugman names no names. In fact the danger of inflation in the short run is minimal, but the qualification is essential and can nowhere be found in the column. He explains why it is minimal, but not clearly, and let me try. Suppose (the example is ridiculous, but I think illuminating) that the national income is $1,000 and that it is spent entirely on consumption goods, which consist solely of ten 1983 Chevrolet Caprices. Then the average price of a Caprice will be $100. The following year, all the Caprices bought the previous year having rusted away, ten more 1983 Caprices are brought to market. Only this time the government has doubled the supply of money. Again the entire national income, now $2,000, is spent on the Caprices, so the average price is now $200. That is inflation--an increase in price due solely to an increase in the ratio of money in circulation to the goods available for purchase.

But "in circulation" is vital. For suppose that, in this second year, the people become fearful and decide to stuff half their income under their mattresses. As a result, only $1,000 is spent on Caprices, and so the average price is unchanged, even though the supply of money has doubled. For it is only money that is put to use to buy things that influences prices. As Krugman points out less clearly than he might have done, the depression has caused both banks and individuals to hoard cash. The cash that the Federal Reserve has pumped into the economy by buying bonds has mainly ended up as "excess reserves" of banks, meaning lendable cash (as opposed to "required reserves," the cash that the regulatory authorities require the banks to hold on to, either in their vaults or as accounts with a federal reserve bank, rather than lend or otherwise invest) that the banks are sitting on rather than lending or otherwise investing. And the personal savings rate has soared because people are worried about the economic situation and so are cutting back on spending and, if they can afford to, saving more of their income instead.

But the curtailment of spending is, we hope, a temporary condition. As the economy improves, the banks will start to lend, and individuals will spend more. The excess reserves will become money in circulation (before the onset of the current depression, total excess bank reserves were only about $2 billion). And so there will be a risk of inflation. The Federal Reserve can, in principle anyway, prevent the risk from materializing, by selling its huge inventory of public and private debt and retiring the cash that it receives in exchange. But by sucking cash out of the economy it will drive up interest rates, which will impede recovery from the depression, because high interest rates curtail lending and therefore spending. So it may forbear, and the consequence may be inflation.