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The classic definition of inflation is the inefficient use of money.

Given our fractional reserve system and the continuous printing of money as a marker of our peculiar form of economic success "inflation" could be made to stand relatively still as long as demand for products grew along with the supply of money.

It is the stall in demand for goods that initially causes what is now an (overprinted) oversupply of money to go into a deflationary mode.

I think we have one more phase of demand that will see pick up again for a few more years. Then there will be hell to pay.

For years I listened to the conventional wisdom and was opposed to inflation because the government and the newspapers said we should be opposed.

Then one day a friend with a comparable job to mine, but somewhat greater financial success in life said to me: "Why should we be against inflation? I personally have benefitted greatly from inflation?"

I reviewed my life's financial history and realized that I too had benefitted from inflation. The only problem was that I had not properly positioned myself to take full advantage of inflation.

I started living well below my means and made some investments which would benefit from inflation. As I approach retirement I realize that these few words were the best advice I had ever received.

The bottom line here is that once a government issues paper money, inflation is created becasue it is always easier for the government to print more money than to take it in taxes. Betting that politicians will be fiscally irrresponsible is always a good bet.

As I have pointed out before, Greenspan had one knob to turn: interest rates. Since you cannot set the interest rate to zero or negative, each turn of the knob brings you closer to 'zero control authority'; i.e., that trick won't work anymore.

Since turning the interest rate knob down kept Clinton in office--among other things--there is precious little control authority any longer.

Ergo, the economy will do as it will and Greenspan is powerless to do anything about it. Indeed, about the only thing he can do is turn the interest rate knob the other way, increasing rates and stimulating inflation. So to suddenly discover that 'deflation' is a danger is risible: all he can do is inflate, and make himself to be a knight in shining armour against the 'deflation' dragon that he himself created.

--Boris

it is surprising that its conclusion on prospects for economic growth was neutral.

It was not neutral. The conclusion that it was neutral is a very common mistake that people make when assessing probabilities in their heads. What the Fed actually said was,

"over the next few quarters the upside and downside risks to the attainment of sustainable growth are roughly equal"

Many people will interpret this to mean that the "most likely" outcome is somewhere around the middle, i.e. that they are 'neutral' about the prospects for growth. But that's not what it means.

What it means is that the band of reasonably probable outcomes is wider than usual. It amounts to saying, "The growth rate might go up, and it might go down. In fact it might go up by a lot. And it might go down by a lot. We don't know which, because those all appear to be equally likely outcomes. That is not the same thing at all as saying, "The best guess is that it will be somewhere in the middle." The real best guess is that whatever it is, it will be a surprise.

This is not a happy time to be a banking regulator. A wildly unpredictable future is the fright scenario, because all the tools at your disposal take months before they will have an effect. My guess is that when they finally conclude that the economics can't tell them anything, they'll go with the politics: step on the gas.