I had the same problem getting my mind about the deflationary scenario and the huge influx of money from the Fed and I finally came up with a conceptual idea that made some sense to me. I don't know if it will make sense to anyone else, but here goes.
The system, i.e. our economy and especially the financial industry, over-leveraged and bought a tremendous amount of things on borrowed money over the last 10-20 years. With leverage going from 10-1 to 40-1, most financial institutions had a tremendous impact positively on the economy while amassing their pile of assets. However, the party stopped, the last mortgage and other assets were bought and everyone has tons and tons of stuff on their books. Now the prices started going DOWN. Now, leverage works great when things go up and works just as well or bad as the case may be, when prices start going down.
So, financial institutions started losing gobs of money, wiping out their capital base, sometimes many times their base. So, the government has stepped in hoping to keep the ships from sinking. They are pouring tons of money in, and yet this is not spurring demand, it is just life-support.
And until the massive amounts of assets are valued at marketable levels and the institutions have gotten their leverage ratios to a manageable level, there is no danger of inflation. Thus the deflation scenario. Until there is demand in the system, money can be poured into the system without much worry of inflation.
However, once equilibrium is reached and the economy starts functioning more normally, demand picks up, companies and individuals start buying, then all the money in the system will become a worry in relation to inflation.
So, it is at least a two step process: First, stem the current hemorrhaging situation. Then, afterward, inflation will become a huge concern.
My 2 cents.
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