Now, the thing about Schiff and all the other Austrians predicting runaway inflation is that they were right to make this prediction given their model. If you believe that a recession is caused by a failure on the production side of the economy, the result of past malinvestment or something, you should also believe that any attempt to correct this decline by expanding credit will simply result in too much money chasing too few goods, and hence a lot of inflation.
By the same token, the failure of high inflation to materialize amounts to a decisive rejection of that model. (And no, it’s not because the numbers are fudged; independent estimates don’t differ significantly from official inflation.)
First, I agree that since the increase in the monetary base has come about by expanding bank reserves, the only way the new money will move into the economy will be through a huge expansion of loans, which has not happened. Yes, much of that new money has gone into government bonds, but we have to remember that much of what is raised through government bond auctions is used to pay off previous bonds. (This is something the ancients once called "robbing Peter to pay Paul.") Even Austrians know that the new money has to circulate before it affects asset prices.
However, Krugman misses something that is obvious: The Austrians, including Schiff, recognized the housing bubble for what it was, a huge set of malinvestments. After all, if there are no malinvestments, there is no bubble. So, how could a theory that actually predicted the meltdown also be a bad theory, if we are to use Krugman's criteria for determining if a theory has validity or not.
Second, while we have seen significant price increases in food and fuel, and these increases come in part because of the continual debasing of the dollar. What we have not seen has been hyperinflation and I agree with Krugman that this is because the economy is depressed. No one in the Austrian camp would deny this.
Third, the very fact that we have had massive malinvestments that cannot be supported by the market certainly is going to bring a downward effect on the economy and on prices. Furthermore, with government moving vast amounts of money to prop up the failing housing market, not to mention subsidizing "green energy" and banks, why should we be surprised that there is a huge lack of economic growth?
However, understand that Krugman also has called for government measures that would vastly expand the rate of inflation, that being his call for the Federal Reserve System to be the primary buyer of U.S. short-term securities, something that for now is prohibited by law. (Krugman claimed that a "clever lawyer" could find a way to re-interpret the law, and I am sure he is right, given how the government has re-interpreted other laws to fit the interests of politicians.)
If that were to take place, then there is no doubt we would see massive inflation as the bond sales would be financed almost entirely by new money, which then would be spent by the government. Krugman pretty much said the same thing in his Monday column, claiming that government can just print its way out of this morass without any real consequences, since inflation would "be good for the economy."
There is one thing that troubles me whenever Krugman claims that Austrians are willfully blind because they have not bowed to Krugman's demands that they declare the Austrian Theory of the Business Cycle to be invalid, and it is this: If real increases in government spending, massive Fed purchases of both private and public securities, and vast subsidies given to "green" industries, along with a huge auto industry bailout have not produced a robust recovery, then should not Krugman also take a hard look at his model?
(Yes, yes, I know. Krugman says that the problem is we have not had enough government spending, enough taxation, enough printing, enough borrowing, and, of course, enough inflation. After all, Krugman is a strong believer in the post hoc ergo propter hoc fallacy of inflation and economic growth, and despite historical evidence to the contrary, Krugman is not going to abandon what seems to be his real religion.)