So the Fed embarks on Quantitative Easing II in order to try to pump the economy. They are doing this to avoid "deflation", which apparently is worse than the hyper-inflation they are planting into the system (and if this word seems alarmist, take a look at the price of gold, wheat, oil, or any other commodity over the past six months. These price increases are starting to be factored into food, gas, and anything else that uses raw materials, and these price increases haven't led to increased employment).
Why does the Fed think that a lower dollar and lower interest rates will boost business spending? Businesses are sitting on giant cash hoards and not investing. Why would lower borrowing costs change this?
And why is deflation so bad? I have been working in an industry where deflation is a part of life: technology. Anything we sell today will be selling much less a year from now. In fact, our customers expect to see a "cost down" roadmap of 15% per year MINIMUM, sometimes much higher. We work with it, factor it into our planning, and of course it inspires us to do more with our products, to put more things into them so we don't have to reduce prices so much (which is why you get so much more for a laptop for the same price today as you did five years ago - the price has deflated, but more memory, larger disk storage, etc. was added to keep the price even).
We hear about how the poor spend everything they get, and how an increase in benefits goes directly into their spending. So if there is deflation, doesn't that mean they get to buy more things for less? So deflation helps the poor. The only people who spend less during deflation are people who can plan their purchases, so the better off supposedly delay purchases, but the big ticket items that group already buys - TVs, appliances, anything with technology - already has deflation, and has for years.
"Required" inflation is a theory from Keynesian economics, but that theory was put forth for increasing populations pushing for more goods. But what if the population is decreasing (like Japan)? Or what if people are just tired of buying crap (including housing) like we have now? The theory is silent in these conditions, but that doesn't stop the Central Bankers from using the only tool in their box instead of letting things work themselves out.
This will be a case of the cure being worse than the disease.