Paul Krugman has been busy as a bee of late tearing into QE truthers and inflation hawks for their gross ignorance. How could they have been so stupid to believe that QE would cause inflation? he asks. Let me show you my IS-LM model, which clearly shows that QE cannot trigger inflation during a liquidity trap.
Before delving into the flaws of his argument, let’s be clear: he is right in some respects.