Today's economists should count themselves lucky. Thanks to the Federal Reserve, they are living through the greatest macroeconomics experiment of recent times. Already the Fed's gigantic monetary expansion is causing many old shibboleths to be abandoned. At the end of it, whenever that happens, many unanswered questions will be answered. In what shape the subject of the experiment, the US economy, will emerge is of course another question. But heck, what's the razing of the US economy compared with the advancement of science!

After the Fed expanded its balance sheet by a previously-unheard-of amount beginning 2007, Robert Murphy, a senior economist of the Austrian school, predicted high inflation. (I use inflation here in the sense of rising prices, not as the Austrians term it, a high growth in money supply.) In March 2009 he wrote: "At this stage nothing is certain, but the country is currently headed straight into a period of very rapid price hikes and a very bad recession. It would not surprise me at all if the national unemployment rate and the annualized rate of consumer price inflation both broke through into double digits by the end of 2009. Moreover, regardless of when it actually starts, I predict that things will get much worse before they get better, and that the United States will be mired in a malfunctioning economy for at least a decade, with price inflation in the double-digits (possibly higher) the entire time. We can call this condition 'hyper-depression'." See The Threat of Hyper-Depression.

The inflation that Murphy predicted hasn't come about. One result has been a crack in the Austrian theory. A paper by Vijay Boyapati titled Inflation: An Austrian overview of the inflation versus deflation debate argues that the Austrians were wrong to predict high inflation. Boyapati is a former Google engineer turned Austrian economist who devoted a lot of time to Ron Paul's presidential campaign. In the paper he abandons the idea of the money multiplier, an idea that he notes "is common to both Austrian economics and neoclassical economics". This paper was written in 2010. In recent months I cannot recall any Austrians writing about the threat of high prices.

So Round One, it would seem, has gone to Paul Krugman and the Keynesians. But the Fed should soon help us resolve whether the match will be won by them. For several years they have been calling for more expansion. In their opinion the low inflation is a sign that the Fed can loosen up much more. If the Fed does decide to heed their call and loosen up even further we should see a smart recovery. On the other hand, if the Fed decides not to loosen up then the US economy should move back into a recession in a gradual, slow spiral. In either case there can be no doubt that the redoubtable Dr Krugman was right after all.

The third prediction is one that I am making. This says that monetary expansion is at an all-time high right now and if it is not showing much of a positive effect on the real economy it is because the increased money has gone to inflate the prices of one or more financial assets. When those financial asset markets collapse, banks will find themselves in trouble and cut back lending, and the final effect will be a severe recession.

May the best theory win. Too bad about the patient!