One fear I have is that by firing up the dollar printing presses to churn out north of a trillion dollars (first $700B bank bailout, new Obama $570B infrastructure program, $25B auto bailout) the currency will be further diluted. In the short term we might be able to avoid deflation (more on that later), but in the long term see high inflation that will be hard to stop without other consequences. The trick would be to put enough cash into the system to kickstart it, but then get most of it back out of circulation through taxes quickly enough to avoid inflation. Tricky business, and I doubt they will get it exactly right or completely wrong. Somewhere in the middle as usual.
Deflation is a "paper tiger" demonized by Keynesian economists and pro-inflation government (more on that later). Deflation is a good thing when it's needed, so long as it doesn't happen at a very high rate. You're right about the inflation part. Our overall money supply has shot up 90% since this crisis began. Right now it's sitting in reserves but, if they manage to open the credit floodgates, inflation will become a very serious problem.
Some "experts" use the term hyperinflation, but that seems too extreme. If hyperinflation is defined conservatively by the doubling of prices every 3 years, or 26% per year, I don't see that happenning. Maybe 10% per year for a year or two. Interest rates will rise, hopefully curbing inflation but almost certainly also retarding growth.
Considering how far in the toilet (compared to the US) most of the world is right now as well, the dollar will remain the safe haven. I don't see a huge global flight to the Euro, Yen, or Yuan anytime soon.
It really does depend on whether the Chinese and Japanese continue to value our treasury bills. If they decide (and rightly so) that their large stocks are holding them back and dump them, we'll see the dollar hyperinflate and become totally worthless.
Back to the possibility of deflation, I wonder if the instant gratification aspect of many uberconsumers will help to fight deflation. The theory of deflation is that people will delay buying because they think it will be cheaper tomorrow. What this doesn't account for is the irrational need to buy for many people. And they want it RIGHT NOW. As long as they have money (or room on their credit card), they will buy. This would lessen the chance or severity of deflation.
Precisely why deflation is not so bad like so many economists like to say. People will still buy but they will have a greater tendency to save, which is something our economy badly needs. Inflation is our government's dirty secret tax on society that hits the wage earners and retired / benefits recipients the hardest. When any extra money is first produced, it still has the purchasing power of the previous supply. As it circulates and dilutes into the system the prices adjust for it. By the time that extra money supply finally filters to the wage earners, they have already been paying for the extra inflation and, as a result, keep falling behind the curve. Inflation is how governments "skim off the top" and finance a lot more than they actually collect in taxes.
The irony of our situation is that the "wise" consumers would pare back their spending to keep a reserve for possibly darker days ahead, while hoping the rest of the suckers in the malls keep buying. But if there were too many wise consumers then the process falls apart and deflation is inevitable.
One can only hope. As explained above, deflation would be a nightmare for our government as they would have to really cut their spending.
I try not to be too rosy nor an extreme pessimist. But IMO, when this is over in a year or so, you will see permanent changes in the banking system and the general outlook of many people. Industry that actually makes things will be valued in the US. The rest of the world's economies will be weakened and start to rebuild with possible new winners and losers. The US will not be as rich as it was, or at least as rich at it appeared to be. But we might be better off in the long run because of it.
The way we're going now with Keynesian "spend into prosperity" politics, we may get out of this mess in 5-10 years but our financial system is doomed to failure on an unsustainable inflationary policy. The house of cards has to collapse eventually. I see our governments taking this opportunity to seize more power and move to a One World Currency, allowing them to burden most of the world with an inflation tax and laugh all the way to the bank -- which they would own anyway.