What this account is missing is any mention of credit. Fact is, for some time now credit has been equivalent to cash in terms of how the economy responds. In other words, Joe Sixpack doesn't know that his bank deposits are lent out while they are still counted as his asset, or that the notes created thereby, such as mortgages, are resold in a manner whereby both the original mortgage holder and the new contract owner (the holder of a "derivative" investment) can count the money as an asset. There's no clear limit to the number of times a simple asset can be in essence cloned, counted as being "out there" in the economy.

The result of this practice is that a huge amount of credit -- just bookkeeping entries -- has  been treated just as though it was real money in the bank, when in fact it's just a bet on a bet (on a bet, etc. -- you get the point) that the original asset will appreciate. 

Last year we witnessed the collapse of that credit bubble. The losses -- "vapor" money that never existed except on the books -- are counted in the very low QUADRILLIONS. Yes, the government has been printing money and issuing bonds (basically the same thing) almost as fast as they possibly can, resulting in a few TRILLION dollars added to money supply. 

Bottom line: It will take roughly a thousand times the amount of inflation experienced last year in order to even catch up with the credit (treated as money) that has evaporated into thin air (the source of inflated dollars, by the way). It may be that some -- maybe even a lot -- of bad credit can be liquidated in ways that harm only the guilty parties in this drama. We'll see. But for now, don't expect the gargantuan deflation created by the burst of the credit bubble to be offset anytime soon by even the most ambitious inflation.

For a better explanation of all this, read the many pages Bob Prechter has written in his books and articles at ElliottWave.com.