Thanks to Matt for passing this along.
The substitution of federal debt for private debt is presumed to be the solution to the decline in credit demand. For governments who borrow in their own currency, however, this may over the next decade revive a problem now thought to be irrelevant.
The relative roles of public and private credit demand, then, likely hold the key to the long-run outlook for inflation. The federal government is the primary source of credit demand in the financial system, which is unprecedented in the postwar period as shown in Chart 3.
Political imperative is likely to maintain this relationship until private credit demand revives. Since the deleveraging process for households is likely to be measured in years, growth in government credit is almost certain to continue at rates that by historic standards are excessive. We reluctantly hold to the view that this paper money episode is as prone to a revival of inflation as those of the past.