If you pay much attention to the financial news, you will hear how we (meaning Americans) don't want to end up like Japan of the last 10 or 20 years. If the American economy, in the next ten years, is like Japan's economy of the last ten years, we will be lucky.
We hear that Japan has been trapped in a deflationary spiral that it can't get out of. First, it is hard to call it deflation. There have been a few times where the price index reports show a slight drop. Basically, Japan has experienced stable prices over the last couple of decades.
But even if Japan really did have deflation (monetary or price), it is a myth that it is trapped. The Japanese government has had some horrible policies in the past. It has done its fair share of stimulus packages and the debt to GDP ratio is near 200%, bigger than any major country. The one thing it hasn't done is gone crazy creating money out of thin air (at least relatively speaking).
Any central bank that wants to avoid a "deflationary spiral" can do so. The Federal Reserve or any central bank can buy assets at any time. The Fed could buy more bonds. That is the most typical method. It could buy mortgage-backed securities as it did in 2008. It could buy stocks. It could buy baseball cards and used furniture. Bottom line, the Fed can create money out of thin air any time it wants. It doesn't do this because it could eventually lead to hyperinflation. The Fed is walking a tightrope right now, but it can cause high price inflation at any time. Bernanke has said so himself. The Fed just has to credibly threaten to dramatically increase the money supply. It could also force banks to lend.
The purpose of this commentary is not to predict inflation, but just to make you aware that the Fed and any other central bank can inflate at any time.