Deflation and the Run of the Bulls

Paul McCulley of PIMCO fame has a recent article on the fear of deflation and its relationship to monetary policy. Taking a page out of Helicopter Ben's playbook, McCulley asserts that fear of deflation requires the Fed to maintain "inappropriate" monetary policy in order to conquer the demon which has plagued Japan for the better part of two decades.

While I think many would agree with that assertion, the point is there are few beneficiaries and many casualties of such a policy, if it is successful. The beneficiaries are debt-holders, such as the US Treasury and all those who irresponsibly overborrowed against their house to overconsume in the short-term. The worst casualties are retirees on fixed pensions whose buying power has declined in equal measure to the policy's success. Current workers who have saved will also suffer as the value of their savings decline in real terms.

There are really 2 questions that mus be pondered:

1. is the fear of deflation real?; and
2. can the Fed really enginner inflation when Japan has not been able to?
   

One point to ponder with respect to the US / Japan comparison: in the mid-90s, the US castigated Japan for maintaining zombie banks on life support rather than allowing them to fail and then driving on...is TALF and the assortment of other programs the Fed has engineered not doing precisely that?

Comments welcome...