There is a considerable argument between commentators at present as to whether, apart from a pretty painful recession, we are in for a bout of inflation or deflation. Both sides have apparently cogent arguments, and maintain their positions with considerable vigor. Robert Samuelson, having recently published a book “The Great Inflation” that suggested another burst of inflation was inevitable, has now produced an op-ed in the Washington Post warning of the rapidly approaching dangers of deflation – such are the dangers of publishing schedules! Having in the past suggested that inflation was inevitable, I thought it worth looking at the deflationist case.

Money supply data, first, do not suggest that deflation is imminent, although to some extent they contradict each other. M2, the broadest money supply measure now published by the Federal Reserve, was up 7.4% in the 12 months to November 3 (suggesting a potential inflation rate of 6-7% since Gross …