In 1862 the deficit that year was about 12% of GDP, in 1919 it was 16% and in 1948 (after WW II) is was 25%. That is the one year deficit. The total debt, in 1948 also hovered near 90% of GDP. With the current 2009 deficit at about 12% of GDP we are way beyond the normal rates of 3-6% of GDP and the total debt of $12+ trillion is 85% of GDP.
My reminder, is that we have been through this before.
Let me try to balance this legitimate concern of future inflation (that, indeed, we may have).
Here is an interesting white paper from the Federal Reserve on Government Debt and how it affects us and the economy. It was written in 1998 (it is 73 pages long if you are interested in an academic approach/study of this issue):
http://www.federalreserve.gov/pubs/feds/1998/199809/199809pap.pdf
Yes, a deficit can be the source of sustained inflation but only "...if it is persistent rather than temporary and if the government finances it by creating money (through monetizing the debt)...", rather than Treasury bonds in the hands of the public or other government agencies.
Yes, money has been printed (created out of thin air) "big time" during this crisis that is over 2 years in the making.
And, yes, the deficit for 2009 is very, very huge from a normative, historical perspective. I agree. It also was necessary to avoid a major depression. I believe that from my studies of the subject.
If this deficit is temporary, then it may minimize somewhat some inflationary after-affects. Is it? Based on the Congressional Budget Office (CBO) latest 10-year projections the deficit is expected to continue but not at this 2009 level and will be back to about 3% of GDP within two years.
That is still unacceptable to me and still raises the total debt annually, but not nearly a $1.5 trillion or more deficit year after year - that would simply be untenable.
With debt monetization (The Fed purchasing Treasury Bonds in open market operations), government debt is eventually reduced but with inflation usually taking its place. But it is:
the EXPECTATION OF INFLATION that is the "real" problem, not the actual inflation rate.
It is not just the growth in the money supply that needs to be observed but also (1) changes in bank reserve requirements and (2) the declines in the money multiplier (3) unemployment rates and (4) the slack in capacity utilization (currently at 69% of production capacity versus an average of 75% and a high of over 82% just before this crisis). For that #4 reason alone, we were probably headed toward an inflationary environment but this financial crisis came upon and ended that temporarily and so maybe we should be thankful for this reprieve.
It is the job of a central bank (our Federal Reserve System) to earn, through its actions, the public's confidence in its commitment to price stability. If done, the expectation of inflation is lowered. Dr. Ben Bernanke has studied the Great Depression at length and I believe his actions of debt monetization (printing money and flooding the markets with liquidity - money) are absolutely necessary to avoid an economic disaster of even worse proportions.
Can he manage future inflationary pressures? Yes, I believe he can and there are many methods to do this, just as there are many ways to provide liquidity to the system, in addition to interest rate manipulation. This latest change in the Federal Debt, though large, "...may still have a smaller effect on interest rates if it occurs in the contraction rather than the expansion phase of the [business] cycle..." (from Daniel L. Thornton; Senior Economist with the Federal Reserve's white paper on Monetizing the Debt; 1984).