Earlier this month, the New York Times op-ed page featured, side by side, two very smart people presenting very different arguments.

Allan H. Meltzer, a Federal Reserve historian and monetary policy expert, argued the Fed is debasing the dollar and laying the groundwork for hyperinflation.

Paul Krugman, a Nobel Prize-winning economist and regular columnist, contended deflation threatens to derail the U.S. economy. Krugman appealed for more of what Meltzer said is sure to destroy the dollar, namely quantitative easing and stimulus.

Whether intentional or not, this juxtaposition illustrates the extreme divergence of inflation and deflation outlooks in the bond market.

"There are camps that believe both deflation is imminent and inflation is imminent," said Eric Lascelles, chief economics and rates strategist at TD Securities.

The reality is somewhere in the middle, he said.

Treasury bonds by themselves paint an unfinished portrait of inflation because yields have been whipsawed more by flight-to-safety and flight-back-to-risk trades than inflation expectations.

A more direct depiction is the TIPS spread. This entails subtracting the yield on a 10-year Treasury inflation-protected security from a 10-year Treasury note.

These two securities are the same, except the principal on TIPS is indexed to inflation. The difference in the yield approximates the market's outlook for the rate of inflation over the next 10 years.

Right now, with the 10-year Treasury yield at 3.26% and the 10-year TIPS yield at 1.61%, the TIPS spread is 1.65%, according to Bloomberg LP.

As Janney Montgomery Scott fixed-income strategist Guy LeBas put it, a 1.65% annual rate of inflation "is not elevated by any means, but it's not zero."

LeBas said the more immediate risk is deflation. Commodities prices down sharply from their peaks, slack in the labor market, and tighter credit availability are doing more to dictate price levels than the Fed's quantitative easing, he said.

This seems to conflict with some economics textbooks, which state that the expansion of the money supply is the very definition of inflation.

The money supply based on M1 - currency and checking accounts - has swelled 15.9% in the past year, according to the Fed. Based on M2 - M1 plus savings accounts and money-market funds - supply is up 8.5%.

LeBas explains this "inflation" is merely replacing some of the money supply lost through the deleveraging of the financial system.

Normally the Fed uses banks as intermediaries between the financial printing presses and the economy. Banks multiply the money created by the Fed by lending the same dollar out several times.

When banks do not lend and people do not spend, inflation can be minimal even if the Fed is printing more money because each dollar is being multiplied at a lower rate.

The Fed implementing its shaken-up, Scrabble-tile-set of liquidity programs and slashing its benchmark federal funds rate to a range of zero to 0.25% can only do so much to inflate the money supply. Banks create most of the money. Right now, they are not creating as much.

Consider that outstanding consumer credit in March was down 5.3% from a year earlier, according to the Fed.

In its quarterly survey of senior loan officers, the Fed reported banks continue to clamp down on credit availability for mortgages, and standards for business loans remain elevated.

In addition, demand for loans from borrowers is down sharply.

"The money multipliers are disengaged," said Alan Levenson, chief economist at T. Rowe Price. "Inflation depends on money chasing goods. You need to have [money] supply greater than demand. If the Fed is creating money and people are just paying down debt with it, or to the extent that they're buying something it's being sold out of inventory and not produced, you're not creating inflation."

Janney Montgomery Scott has its own measure of how spendthrift or miserly banks are with the Fed's money. Janney's Credit Availability Oscillator, which is based on interest rates and spreads, is at negative 20.5, with zero indicating neutral credit availability.

This is reflected in the velocity of money, which measures how often a dollar in circulation is spent each year. Each dollar in the U.S. economy was spent 10.3 times a year this time last year, based on gross domestic product divided by M1. Now the velocity is about nine.

For months in his weekly reports, Citi municipal strategist George Friedlander said he constantly hears questions from clients about inflation. And he constantly tells them to stop worrying about it.

"Concerns about inflation continue, despite widespread counter-evidence," he wrote in his most recent report. "It is quite premature to worry about inflation for now, with prices under downward pressure and prospects for inflation under the short and medium term well-contained."

The labor market could remain weak for five more years, Friedlander said, which would keep inflation momentum in check.

Plus, the Fed's direct involvement in so many facets of the economy gives it "considerable leeway" to lasso inflation when the time is right, he said.

Just because Friedlander does not worry about inflation does not mean he does not worry about bonds. Treasury yields will probably creep up, he said, just not because of inflation.

Treasuries will sell off as people become more willing to take risk, he said.

The consumer price index in April was down 0.7% over the previous year, according to the Bureau of Labor Statistics. The main reason is falling energy prices. The cost of a barrel of crude oil has tumbled from about $150 last summer to about $60 today.

Levenson thinks the inflation rate implied by the TIPS spread might be too low. The free fall in commodities prices has likely run its course, he said, and commodities prices are primed to tick higher.

He also thinks the rate of inflation the Fed considers acceptable may have changed.

For years the Fed has talked about informally targeting an inflation rate of 1% to 2%. Levenson suspects the Fed has learned something important in this crisis - when inflation is too low, it limits the central bank's flexibility.

He thinks the rate of inflation as measured by the consumer price index could be closer to 2.5% "as far as my crystal ball is going to go out."

TD Securities' Lascelles has a benign outlook.

While a decline in CPI technically denotes deflation, he said deflation is devastating only when people substantially change their behavior.

It would take a disastrous turn in the economy - perhaps a 10% decline in GDP - to reach that level, according to Lascelles.

Nor he does he see reason to panic over inflation.

If inflation really picks up steam, that would probably mean the economy would be growing again, he said. If that is the case, Lascelles said it would be easy for the Fed to raise interest rates and unwind the myriad liquidity-creating positions on its balance sheet.

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