I need to answer some fundamental questions about inflation and liquidity.
What is inflation?
The American Heritage® Dictionary of the English Language, Fourth Edition, Copyright © 2000 Published by Houghton Mifflin Company says:
Inflation: A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

This definition of inflation actually pertains to 'price inflation'.

It is key to note that inflation is only caused if the increase in available currency and credit is beyond the proportion of available goods and services. 'Monetary inflation' does not necessarily lead to 'price inflation' - atleast in the short term.

So now what is 'liquidity' - The degree of ease and certainty of value with which a security can be converted into cash. That is a broad definition for assessing the liquidity value of any asset. What is the value of U.S. dollar assets that is 100% liquid?

The Federal Reserve tracks and publishes the money supply measured three different ways-- M1, M2, and M3. They recently stopped tracking the M3 value. All these measures can be considered to be 100% liquid.

These three money supply measures track slightly different views of the money supply.
The most restrictive, M1, only measures the most liquid forms of money; it is limited to currency actually in the hands of the public. This includes travelers checks, demand deposits (checking accounts), and other deposits against which checks can be written.

M2 includes all of M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds.

M3 includes all of M2 (which includes M1) plus large-denomination ($100,000 or more) time deposits, balances in institutional money funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada."

Effect of liquidity on inflation in the current global world

All the bears have been crying out 'inflation, inflation' when the Feds started decreasing the interest rates in 2002. It is certainly strange that none of those doomsday predictions came true. The decreased interest rates did raise real estate activity and real estate prices but it also increased the liquidity in the market. I will present data later. But this increased liquidity did not spur inflation in the way a lot of economists feared. I would like to discuss this phenomena to get a better understanding of the macroecon picture in a global economy. In a global economy, the rules of the game are not the same as those in a regional economy or in an economy constrained within the national borders of a country.