If you're really interested in reading more about economics I wouldn't suggest Ned as a source. Try Robert Reich, Calculated Risk, Econbrowser or Brad DeLong.

I would disagree that significant (or substantial, or severe) inflation or deflation are reducing standard of living to make up for past excess. I would say that they can be and have been independent of them. To the extent that they may be desired and actually sought, they may be for “good” reasons. In the case of inflation, the illusion of prosperity, and exploiting true prosperity — the post-World-War-II inflation began by being subdued and was not considered a problem, and as a source I've lately enjoyed calls it, was a “Golden Age” in the USA and the rest of the developed world as it recovered from the war.

“Also our problem is consuming too much and punishing savers is not the right way to go. I think that inflationary policies will also require more international collaboration to avoid complete failure, and this seems unlikely.”

If anything, my normal beef is the age-old conflict between the Chicago and Austrian schools, and I've become wise enough to prefer the latter insofar as I would rather see things resolve themselves in the economy right now. However, and I'm not a sensationalist, but one who paid attention to Japan as a model for others later, this could take years, and I fully sympathize with those who don't want to accept waiting that long for resolution and would prefer to risk intervention now. Hence I accept the reasoning behind even those like Bootle who are English and have a basic liberartarian goodness and sensibility behind him (he objects strongly to the notion that people who work every spare moment to enrich themselves greatly should be heavily taxed, for example, on the grounds of individual freedom, i.e., liberty, as well as of [true rather than bogus leftist misuse of the terms] fairness and justice). Bootle is among those who say what's needed now is a basically unrestricted willingness to intervene to prevent the worst kind of deflation from taking hold. He even is willing to rely on sources like Paul Krugman, who has supplemented his quiet respectable academic work with notorious Democratic Party hack scumminess. He also has referred to the “helicopter drop” mentioned elsewhere on this site, as well as on the Keynesian concept of stuffing money in bottles, burying the bottles, and employing people (presumably the otherwise-unemployed) to retrieve them. (Unsaid was that others, as well as the retrievers, could be employed to stuff money into the bottles and bury them.) I'm strongly on the side of the thrifty and the otherwise virtuous, and in conceiving the “liquidity trap” and “paradox of thrift” and pain of deflation I'm strongly in the savers' camp, as well as the cheerleader wanting people (including me) to wait, wait, wait for lower, lower, lower prices before buying. It's why I am among those who have stated on here that there's not only error in expecting lenders to lend, but for individuals to borrow more or to spend if they're given money. Why _not_ save or reduce debt first and foremost? That's what anyone sensible would do, and one cannot be hated for that even in deflationary times (as well as deferring spending in hopes of lower prices later). That's even without accounting for the development of deflation-oriented thinking and mindsets among people. I'm the last person to be against thrift, which is a virtue.

“volatility can be just as important as the actual values”

This is the distinction between substantial and less-substantial inflation as well as how it relates to predictability, in most people's lives to date. I would add that it would be nice to have economic stasis ideal predictability, but that will never be possible. And in my years to date I've come to believe that a stable price level around zero (the ideal) is often not practical and what's realistic is bounded, but still fluctuating, price stability going both ways around zero change. Sometimes prices will rise, and at other times they will fall, but they will not diverge to the point where the change itself affects people's lives (as it did in the 1970s) or interferes markably with decision making.

Also our problem is consuming too much and punishing savers is not the right way to go. I think that inflationary policies will also require more international collaboration to avoid complete failure, and this seems unlikely.

Finally, from a systems theory perspective, volatility can be just as important as the actual values. Indeed, a lot of the structural damage that is going to be around for years is because of the massive whipsaws in the currency and bond markets. By the Fed setting an explicit policy of using an open positive feedback loop that they will have to determine when to hit the breaks, it's only going to make the volatility way worse. They'd be much better off doing what Ned suggests even if it means deflation. At least deflation is a closed feedback cycle where at some point the feedback switches from positive to negative.Once we get down to that new steady state is when we should try to reinflate.

Not only is willingness to go to a zero-interest-rate policy (or close to it) the right thing now, but the conventional argument (and it is Keynesian, not Chicagoan or Austrian) is that government spending would be in order, too. (And what about interest rate reductions not only for credit cards but more interestingly, for fixed-rate home mortgages?) In addition, governments (not only our federal government but the European Central Bank and other agencies elsewhere) are likely to engage in monetary expansion (inflationary monetary policy) before too long. That's even with decades-long fear and revulsion of inflation by the public and by governmental authorities, in addition to many economists. The time for any interest rate increase (Federal funds rate and so on, not certificate-of-deposit and savings-account and Treasury securities rates only) is in conjunction with inflationary (as well as _successfully_ stimulative) policies in the future, when it is confidently known that there is “reflation” (it belongs in quotes because deflation remains to be proven, though I suspect it's going to be proven, not merely likely).

Going ultimately to a long-term-fixed interest rate policy (corresponding to real economic growth rate or some other measure, ideally in conjunction with a gently varying economic growth rate or change in price levels, sometimes upward, sometimes downward) is intriguing, but it's not the thing to seek yet.