"the Federal Reserve can prevent it, should prevent it, and will prevent it."

James Hamilton on Econbrowser weighs in on deflation risk:

"In a general deflation, the purchasing power of a dollar bill goes higher and higher, and as Greg notes, this can produce big economic problems, as it did for the U.S. in the 1930s or Japan in the 1990s. But it is absolutely a problem that the Federal Reserve can fix. If you increase the quantity of dollar bills fast enough, you're sure to create inflation, not deflation. And the Federal Reserve has unlimited power to increase the quantity of dollar bills.

Some of my colleagues still talk of the possibility of a liquidity trap, in which the central bank supposedly has no power even to cause inflation. Their theory is that interest rates fall so low that when the Fed buys more T-bills, it has no effect on interest rates, and the cash the Fed creates with those T-bill purchases just sits idle in banks.

To which I say, pshaw! "

The Fed could:
1) Buy debt of the Treasury by creating new dollars to pay for it
2) But all commercial paper the same way
3) Ditto Tokyo Stock Exchange
4) Ditto anything else

The net effect would be inflation, but deflation would be gone.

I agree, and made the same point in an earlier post. Here was the conclusion:

"As long as governments print money and run deficits, you cannot have deflation," Lerrick said."

So, in the end, doesn't that mean inflation is the only real problem?

Here's Hamilton answering a question:

"I'm claiming that prolongued deflation cannot be a reasonable forecast for the United States, because the Federal Reserve can prevent it, should prevent it, and will prevent it.

Posted by: JDH at October 29, 2008 08:47 AM"

From my perspective, this seems clear.