Price is all about attitude, or better yet, expectations. In the 1970s, the big challenge was to break the reinforcing cycle of “inflationary expectations”. With unionized labor a large component of end product cost, the more inflation was expected, the more the unions demanded in Cost of Living Adjustments (COLA). Product price was increased to pay for the increase labor costs. The cycle would repeat and inflation accelerated. This went on until Paul Volcker hit the brakes by shutting down the money supply (by aggressively selling Treasuries) and jacking interest rates to 20% in the process. From that point in 1980 until now, the trend in money supply growth and interest rates has been down until we are now at negative money growth or deflation (the Treasury has been aggressively buying bonds until very recently, eliminating 30 year bonds altogether in the process).

The way out is to increase money supply faster than asset deflation is destroying it. Ben Bernanke is doing just this. Deflation will be stopped by 2010 as surely as inflation was stopped in 1980. But it will eventually bring about the opposite problem, which is what worries a lot of readers of this blog.

Just as paper or financial assets were the place to be during the 30 year period of money supply contraction, hard assets, including gold, are the place to be during a period of money supply expansion. It is also prudent to invest away from the dollar which will depreciate against currencies from countries that have a wealth of natural resources, like Canada and Australia, or that run a large trade surplus, like China.

So, I think most of the readers and writers here are correct in their analysis, but inflation is nothing to fear, as long as one is prepared. The doomsday scenarios (requiring guns) are much more likely in an extended period of deflation (like the 1930s), than in a period of inflation, so long as it stays under 10%, which is manageable.

IMHO

Several have made the point about the printing presses (creation of money) eventually bringing on inflation due to the fact it creates an expansion of the money supply. My question would be, since our money supply (dollar) is a fiat currency (it is not tied to any hard assets anymore)- would one not need to take into account the destructive elements of the bubble bursting on the “money supply”? Meaning – what about all the paper wealth that was disintegrated with the collapsing housing market and then stock market. Yes – much of this wealth was just on paper – but so is our entire monetary supply. Is it possible that as the fed prints money – it is just replacing some of the wealth that evaporated?

I know several people whose net worth two years ago made them millionaires, but who are practically broke today. Despite what “helicopter Ben” has done, their money supply did not expand – but contracted. And they now act accordingly (they are not buying stuff).

I apologize if the question is silly – but just a layperson trying to figure out the best way to protect my family. Should I buy guns and gold or act like Buffet and tread into equities.

Global banking officials have been trying to put the water back in the leaking bathtub by expanding money supply to make up for the “shadow bank” contraction, as PIMCO’s Paul McCulley calls it. So far, they are behind the curve which is why the bathtub continues to empty (prices continue to fall). It is the pricing effect we care about, because it affects our daily lives, not so much the contracting money supply cause.

Instead, the money supply has been growing by enormous amounts. Inflation is the expansion of the money supply. The side effect of inflation is an increase in prices.

Conclusion, the drop in consumer demand is covering up the real inflation (expanding money supply). The money supply has grown so much that we will soon see hyperinflation and Gold/Silver prices Sky-Rocket. The dollar is the next bubble to burst.