You and I, usually after lengthy discussions, tend to think more alike than we think differently.

I have definitely been wrong on the time line of inflation. I thought higher interest rates and more evidence of inflation (other than asset prices like stocks and bonds) would have already have shown up. In fact I would have expected stocks to take a tumble already. So from a practical investment standpoint I've been wrong more than right for several years. My mistake (at least one of them) is underestimating two things. First the extent to which the Fed would go to implement experimental policies that a generation ago it would have never occurred to any sane financial manager to try. So I underestimated the fed. I also underestimated the length the public would go in acceptance of these policies. Or stated another way I overestimated the public being able to understand they are being screwed for the sake of the banking system and willing to take the screwing and even call for more of it.

I think we could have either deflation or inflation also.

Deflation would be the best way, in my opinion, for the malinvestments to be reconciled. Defaults would happen, over leveraged things would de-lever, new owners would own the capital assets, and things would start over from a more solid foundation. I believe deflation is the only proper and fair way to "fix" an economy drunk on debt. Too much debt and obligations were taken on that can't be paid so the debts result in default. That is not necessarily the best outcome for me, but it would be the best in my opinion for the nation long term. Very painful short term.

I believe inflation (at least eventually) will be the end result not because it is the best solution, but because it is 1. more politically expedient and 2. is the easiest to put off current pain although it creates greater pain later. Politicians that go on 4 year election cycles are all for anything that can put off pain at least to the end of their term, even if things fall apart after their watch. That is why I believe that............. eventually............ inflation will be the end result simply because they will keep trying it till they get it. And by the time they actually do get it to their satisfaction it likely will be past the point of controlling it.

But I've been wrong a lot so far, so may be wrong on these points. Maybe we will get the political will to someday have another Paul Volker and someone will have the balls to say what we are doing will not work and we have to change directions. But I'm not holding my breath.

These discussions are interesting and I engage in them not because I think I know everything and I am right about everything, but because I have to do something with my investments and livelihood, so I might as well be as informed as I can about which way things have the potential to go. I just argue for what I believe would be the correct way to address things, not that very many will agree nor that there is ever a chance that it would be implemented.

Embracing deflation is embracing current pain so there will be less pain in the future. Embracing inflation is avoiding current pain and trying to get someone else to pay for the previous transgressions (excessive debt loads). So naturally I believe that the powers that be will try to embrace inflation. They may succeed and they may not, but as long as the public will put up with it, there is no need for them to quit trying.

John