This isn’t really surprising: you expect inflation to fall in the face of mass unemployment and excess capacity. But it is nonetheless really bad news. Low inflation, or worse yet deflation, tends to perpetuate an economic slump, because it encourages people to hoard cash rather than spend, which keeps the economy depressed, which leads to more deflation. That vicious circle isn’t hypothetical: just ask the Japanese, who entered a deflationary trap in the 1990s and, despite occasional episodes of growth, still can’t get out. And it could happen here.We're in the midst of what's looking like a strong recovery, and Krugman makes it sound like the midst of the Great Depression. At the moment, we should be anticipating that the returns on lending are going to start to look very good for banks, and they will lose interest in holding reserves, at which point we get some more serious inflation. This will necessitate some monetary tightening, i.e. an increase in the interest rate on reserves. At this point, though, the Fed should just hang tight, and sell their MBS and agency securities while the prices are high.
There is certainly reason to be concerned about what is going on in Europe. There is panic at large, and we don't need to be reminded that panics don't just happen in some of our models. In this case though, I think the Greek crisis is not a big deal on a world scale. Hopefully in a few weeks everyone will regain their senses, and asset prices will be back where they were - I could be wrong though.