1. The inflation bet had nothing directly to do with Austrian business cycle theory. This is something I pointed out the morning of New Year's Eve and that Mario Rizzo pointed out later that day, and I still think that's reasonable. You can get plenty of examples of Austrians worrying too much about inflation but it doesn't really pop out of ABCT. It could, of course. I don't think Krugman's take on it as a supply shock is nonsensical. It's been characterized as a theory of the real consequences of nominal changes, and Peter Boettke has noted its relation to New Classical economists for a reason (precisely the reason that inspires Krugman to say these things). Maybe the safest thing to say is that there are supply and demand consequences of ABCT. At the upper turning point there is obviously a demand shock when investors pull back, but there is also a revealed supply shock because the capital structure is incapable of producing what is demanded in a non-credit-distorted environment. So I think it's wrong to act like Krugman is just making things up here, but Bob's explanation is sound.
2. Noting that ABCT is not the source of course does not change the fact that he made the bet for a reason. As far as I can tell it's that Bernanke created a lot of money and is either going to forgo or botch the exit strategy (and he's not sure if he's entirely wrong that this could still happen). This is interesting to me because I had always gotten the impression from Bob posting monetary aggregates that he was making a crude quantity theory argument (more money = more inflation), but he seems to be drawing a lot more attention here to what the Fed will do when the crisis ends. That's quite different.
Otherwise he seems to be withholding judgement because he thinks he may ultimately be proven right.
I liked DeLong's initial post about Murphy's inflation bet because he simply suggested that when you expect ten percent inflation and it doesn't materialize, there might be something worth rethinking. He talked about "sitting at the feet of Paul Krugman", but to my ears that just sounded like he was messing with Bob Murphy. There were no detailed theoretical suggestions in it except that Paul Krugman has been fundamentally right and Bob Murphy fundamentally wrong in some important ways these last couple years.
Bob spends a lot of time bashing Krugman and DeLong in the post, and pointing out that David Henderson and he are both supporters of austerity, but he misses an essential point: David Henderson is on Paul Krugman's side of the inflation question! I don't understand why Bob keeps pointing out that David is on the same side of a completely different policy question. He is obviously not on your side when it comes to inflation, which is why he bet against you! Unless we think that everyone who has the same view on fiscal policy has to agree on everything else, I'm not clear on what the point of repeating that is.
Krugman's post (which went up after a lot of mine, btw) was different from Brad's in that it went at ABCT itself. As I say above, I don't think that's completely nuts but I think you can argue against Krugman on that point too.
Finally, Bob's point VI. (B) is completely nuts, and we've been over that ground before.