Steve Waldman explains that America’s net-debtor position (both at the sovereign and at the individual level) means that there’s a lot of pressure towards inflation:
Inflation helps debtors at the expense of creditors. In democracies where those who can vote are, on balance, debtors, one would expect collective indebtedness to favor inflation. Not all citizens are debtors, there would be domestic winners and losers. But on balance, voters gain by printing currency…
It is one thing for a nation’s central bank to stand above the fray with respect to competing domestic interests, but quite another for the bank to put foreign interests or economic ideals above a collective national interest. That’s especially true if the alternative to devaluation is deflation… Officially it is the policy of the American central bank to maintain price stability and full employment regardless of the external value of the dollar. If the Fed faces a choice between deflation and high unemployment, or tolerating a significant inflation (with or without high unemployment), I’m pretty certain it would choose the latter as the less-bad option.
Japan’s experience in the 1990s and the US’ in the 1930s are often cited to suggest the inevitability of deflation, despite monetary policy heroics. But in both cases, the deflating country had a large, positive international asset position. To the degree money was owed by foreigners in domestic or pegged currency, the "national interest", looking past winners and losers, was to tolerate deflation.
I’m reasonably convinced. US Treasury bonds are only "risk free" if you ignore inflation and currency risk. With the country in a very tight fiscal position, once again monetary policy can come to the rescue, helping out debtors (that’s most of us, including the government) at the expense of creditors (mainly the rich).
Of course there’s a big downside. With looser monetary policy and more obvious currency risk, lenders in dollars might require higher real returns on their money — which means that long-term interest rates could rise sharply to make up for increased inflation expectations plus a higher risk premium. That would be bad for property prices, for investment, and for the long-term economic health of the country. Meanwhile, fiscal policy is likely to be no help at all, regardless of who wins.
But this is why we have a clever chap like Ben Bernanke running the Federal Reserve, right? I’m sure he can work everything out just fine.