Back in 2002 Ben Bernanke, then still a Federal Reserve governor, declared that "under a paper-money system, a determined government can always generate higher spending and hence positive inflation." That does not mean it is easy.
    On March 18th America's inflation rate was reported at 0.2%, year on year, in February. The same day the Fed said "inflation could persist for a time" at uncomfortably low levels. Yet some economists and investors insist high inflation, even hyperinflation, is lurking in the wings. They have two sources of concern. The first is motive: the world is deleveraging, ie, trying to reduce the ratio of its debts to income. Policymakers might secretly prefer to do that through higher inflation, which lifts nominal incomes, than through the painful processes of cutting spending and retiring debt, or default. The second is captured by the Fed's announcement that it plans to purchase $ 300 billion in Treasury bonds and an additional $ 850 billion of mortgage-related debt, bringing such purchases to $1.75 trillion in total, all paid for by printing money. It is not alone: around the world, central-bank balance-sheets have ballooned.
    This is scary stuff to those who swear by Milton Friedman's dictum that "inflation is always and everywhere a monetary phenomenon." But the role of the money supply in creating inflation is less obvious than monetarism suggests.
    The quantity theory of money holds that the money supply, multiplied by the rate at which it circulates (called velocity), equals nominal income. Nominal income in turn is the product of real output and prices. But does money supply directly boost nominal income, or does nominal income affect velocity and the demand for money? The mechanism is murky.
    Central banks control the narrowest measure of the money supply, called the monetary base—typically, currency plus the reserves that commercial banks hold with the central bank. But the relationships between the monetary base, broader monetary aggregates and nominal income are highly unstable.
    Central banks have mostly given up trying to target inflation via the money supply. Instead, they study the "output gap" between total demand and the economy's potential to supply goods and services, determined by such things as the labor force and capital stock, as well as inflation expectations. When demand exceeds supply, inflation rises. When it falls short, inflation falls, and in the extreme becomes deflation. To influence demand, the central banks move a short-term interest rate up or down by adjusting the supply of bank reserves. Changes in the policy rate ripple out to all interest rates paid by borrowers.  Ben Bernanke's remark is used to ______.