This notion that we must have 2 percent inflation or the world collapses needs to end. First let's look how the US fared coming out of the 1980-1982 recession. Note that NGDP stayed right around 4 percent throughout the recession, until 1982 when the fed opened up the spigot and allowed NGDP growth to expanded to 12%. As you can see from the graph, inflation expectations remained well anchored throughout the whole expansion process, most likely do to the excess capacity and high unemployment.
Could you imagine how badly people would scream of runaway inflation if NGDP growth was at 12% today?!... Now let's compare and contrast with 2007-2011.
10 year inflation expectations as released by the Cleveland Fed last month are 1.42 annualized. I’m guessing GDP this year and next is right around there.
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