Looking the wrong direction...

Its about time for inflation to start pumping up prices.  Isn't it?  We've thrown money at banking problems and wars and infrastructure.  That liquidity should be chasing goods and services. But now we see...

The 0.2 percent increase in prices paid to factories, farmers and other producers followed a 1.8 percent jump in November, according to Labor Department data released today in Washington. The gain was more than anticipated and reflected higher food costs. Excluding food and fuel, so-called core prices were unchanged.
An unemployment rate projected to average 10 percent this year and excess capacity are giving companies room to hold the line on prices. Few signs of inflation will allow the Federal Reserve to keep interest rates near zero in coming months to help fuel the economic recovery.

“The substantial slack in the economy will keep inflation subdued this year,” Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania, said before the report. “As the recovery gains momentum in 2011 then inflation will be more of a concern and that’s when we expect the Fed to aggressively raise interest rates.” [More]

Moreover, the persistent threat of close-to-deflation isbecoming unnerving to even many inflation hawks.

First, a little bit of inflation might not be so bad. Mr. Bernanke and company could decide that letting prices rise and thereby reducing the real cost of borrowing might help stimulate a moribund economy. The trick is getting enough inflation to help the economy recover without losing control of the process. Fine-tuning is hard to do.
Second, the Fed could easily overestimate the economy’s potential growth. In light of the large fiscal imbalance over which Mr. Obama is presiding, it’s a good bet he will end up raising taxes for most Americans in coming years. Higher tax rates mean reduced work incentives and lower potential output. If the Fed fails to account for this change, it could try to promote more growth than the economy can sustain, causing inflation to rise.
Finally, even if the Fed is committed to low inflation and recognizes the challenges ahead, politics could constrain its policy choices. Raising interest rates to deal with impending inflationary pressures is never popular, and after the recent financial crisis, Mr. Bernanke cannot draw on a boundless reservoir of good will. As the economy recovers, responding quickly and fully to inflation threats may prove hard in the face of public opposition.

Investors snapping up 30-year Treasury bonds paying less than 5 percent are betting that the Fed will keep these inflation risks in check. They are probably right. But because current monetary and fiscal policy is so far outside the bounds of historical norms, it’s hard for anyone to be sure. A decade from now, we may look back at today’s bond market as the irrational exuberance of this era. [More]

The most important issue is the one contained in the previous quote - excess capacity.  Coupled with the mysteriously strong growth in productivity (I blame our Borg-like connectivity) we simply don't need to hire or invest to produce more until much later in any expansion.

This also means the next most likely moves from an even more chaotic Washington  - tax cuts - may not do much other than really fire up the deficit.  One caveat: a payroll tax cut (SS, Medicare taxes) - which many have been advocating would be about as stumulative as anything possible in that category.

Across-the-board tax cuts would do less to stimulate the economy because much of that money would be saved rather than spent, CBO said. A tax cut for lower-income households would generate between 30 cents and 90 cents for every lost dollar in revenue, while a tax cut for everybody, including the affluent, would only generate between 10 cents and 40 cents in activity. [More]

But angry voters wanting lower unemployment and lower deficits may be in for a long wait on both fronts. And hence, investors anxious about inflation could be putting their eggs into the wrong basket.