Tomorrow, Bernanke is expected to explain to congress how the Fed will safe-guard against future inflation having dramatically expanded the monetary base by 100% since last fall. There may be a big surprise waiting, however. Here is why:

In this note from PIMCO's Paul McCulley, he outlines tactics of how the Fed should proceed to, enforce consumer spending, reflate the economy and kill deflation expectations citing previous advice given to Japan by Krugman and Bernanke.

http://www.pimco.com/LeftNav/Featured+Ma...

In essence, the Fed announces to the markets and the publis that the money printed will not be unwound and is here to stay. Not only is this money here to stay, but there will be more (NOT LESS) printing. In order to make this threat credible (to scare the public out of saving and into spending), the Fed will bypass the banks and directly monetize government debt until the price level CATCHES UP TO WHERE IT WOULD HAVE BEEN had there been no economic contraction and deflation of credit. Bernanke calls this price-level-gap.

Excerpts:

“The way to make monetary policy effective is for the central bank to credibly promise to be irresponsible – to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs.”

Krugman


"Of course, one can never get something for nothing; from a public finance perspective, increased monetization of government debt simply amounts to replacing other forms of taxes with an inflation tax. But, in the context of deflation-ridden Japan, generating a little bit of positive inflation (and the associated increase in nominal spending) would help achieve the goals of promoting economic recovery and putting idle resources back to work, which in turn would boost tax revenue and improve the government’s fiscal position.”

Bernanke



If this is the course the Fed chooses, inflation is not just a necessary evil of current actions, it will be an outright goal.

Draw your own conclusions