And if it's all Structural?

QE3 has been announced. Inflation hawks will no doubt complain that either inflation is just around the corner, or it's already here and the government is cooking the books.

Here's an answer for the cooking the books crowd. If high inflation is here, then since nominal gdp has been growing sluggishly for years, then by definition the real economy has been shrinking. Should the Fed tighten money in a shrinking economy? Most would say no.

The fact remains, that even if inflation is 10%, if real growth is -8% due to structural factors, the Fed will pile on a cyclical component if it allows ngdp to fall. If NGDP is allowed to fall precipitously, then people cannot service existing debt and continue to buy things, resulting in a giant drop in demand on top of the supply limitations.This is on top of the massive unemployment sticky wage/price theories would predict.

In the end I think the Fed should focus on a slow steady growth in incomes: NGDP growth is a pretty good target.