Deficit spending has traditionally been associated with inflation. The reason is obvious: if the government want to sustain the deficit spending, the obvious way is to print more money and inflate the debt again.
However, the story isn't as easy as that. Japan is a good example where huge deficit, high debt level, and continuous monetary expansion all failed to produce any inflation at all.
So which side should I bet on?
My answer: deflation for the next 5-10 years or so, and hyperinflation at the end.
Because the economy is deleveraging, that is profoundly deflationary. The government is also now threatened to cut spending, which will ultimately be deflationary as well. So demand is low, the economy slows. Businesses wouldn't want to invest and individuals now save more. That means increasing the monetary base dramatically will not be multiplied through the banking system because banks have no demand for their lending.
But inflation will eventually come back, sometimes. We just don't know when.
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