Government can raise revenue in one of three ways: (1) tax, (2) borrow and (3) inflate. The natural proclivity of democratic governments is to pursue public policies which concentrate benefits on the well-organized and well-informed, and disperse the costs on the unorganized and ill-informed. And there are strong reasons why this bias in policy making will also be biased toward shortsightedness --- pay out the benefits now, and worry about the costs down the road. Thus, the natural tendency for elected government officials is to borrow (rather than tax) and then inflate (rather than tax). Deficit financing, accumulating public debt, and monetization of the debt.
Now a lot of individuals have been claiming that economics as a scientific discipline has been rocked by our current crisis, both due to our failure to "predict" it and our inability to "fix" it with a consensus on the right public policy. And anyone not deeply read in the history of our discipline, or who received their university education in economics in the second half of the 20th century can be excused for such a reading of the situation. This would be the most logical interpretation one could arrive at --- especially if you not only listen to President Obama say that we must work past the dead ideologies of the past and the "do nothing" arguments (as if that argument has been actively pursued since Grover Cleveland).
But what if the problems are not the dead ideologies, but instead a live political pragmaticism that has forgotten the basic ideology that made possible the great growth of the wealth of nations and provides the foundation for Western civilization? Namely, private property (as Hume put it: a system of property, contract and consent), freedom of trade, and social cooperation under an international division of labor. Government rather than unleashed must be constrained; and constrained in such a binding way that it is not possible for elected officials to pursue the natural proclivities to provide privileges to political favorites (concentrating benefits and dispersing costs).
Adam Smith warned with respect to not only free trade, but also public debt that what was folly for the individual is certainly folly for the nation. Well just look at some basic economic data --- budget deficits or surpluses as a percentage of GDP from the Congressional Budget office. We have had pretty big deficits since 9/11.
Milton Friedman taught us that inflation is everywhere and always a monetary phenomena. Wage-pull, or cost-push inflation stories do not make sense. The oil shocks of the 1970s don't explain inflation, it would explain a relative price change, but not a change in the general price level. Money supply and money demand determine that.
However, as Tom Sargent has discovered in his work on hyper-inflation, Friedman's dictum is correct, but could be modified by simply pointing out that hyper-inflations are everywhere and always preceeded by fiscal imbalance. In short, the natural proclivity of government has consequences. They want to spend more to meet electoral promises, they do so in the short run, and when the bill comes due they want to print more money to pay back in cheaper currency. When spending gets really out of control (is a national debt of $10trillion out of control?!), then they monetize at such a rate to threaten to destroy the currency through hyper-inflation. A broad definition of the money supply is MZM and it is kept by the St. Louis Fed -- as you can see it has been going up.
The US has made a lot of bad policy choices that violate the teachings of basic economics and common-sense for over half a century. We have not yet destroyed the US economy through these choices, but we are potentially on that path. The most effective way to get off that path would be to establish new restraints on the natural proclivities of elected politicians (take away discretionary powers in fiscal and monetary policy) and unleash the private sector and the creative powers of entrepreneurs. We can still pull out of this current crisis, but first government must stop making matters worse by catering to the natural proclivities of elected officials (from whatever party). As James Buchanan once summed up the policy wisdom of public choice: "Don't let the fox guard the chicken coup."
Bottom line: combine Buchanan's warning about the guardians, and Hayek's insight on the creative powers of a free civilization, and you have your answer. It ain't rocket science, it is just economic science.