The US is in a balance sheet recession. The great moderation was possible because of loose monetary policy over the past 10 years, which helped credit growth to an unsustainable level.
As a result of that, bubble after bubble were formed, and one burst after the other. Now, after the burst of the housing bubble, finally, the private sector is in a painful process of deleveraging.
Quantitative easing will not work because monetary policy has been very loose. The problem is there is little demand for credit because of all the deleveraging, so making credit easy does not make credit growth at a faster rate.
At such time, only the government can be not deleveraging. But facing with increasing political pressure in the United States, one might expect that the government may be forced into some sort of austerity some time. If that happens, that is going to be deflationary.
The obvious precedent of such situation is Japan.
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