I think inflation will tend to remain low in consumer prices, as demand will probably remain weak since the consumer is tapped out.
Credit is still contracting in the economy and, thus, the purchasing power of the private sector.
We have seen, however, that the government is trying to replace the private sector with out-of-control deficit spending, which is near 10 percent of GDP.
Coupled with that, we have seen “easy money” policies, or “money printing," which has caused asset price inflation.
Stocks, commodities, gold, corporate bonds and emerging markets have all enjoyed tremendous gains since last March. The easy money has to go somewhere. Bankers are also enjoying fat profits due to the latter.
How long can the United States keep pushing these deficits?
It is hard to say. Rates should rise.
The problem is that even though the dollar is flawed, the euro and the yen aren't in much better condition.
It’s the battle of the "worse" currencies.
Due to the PIIGS problems (the economies of Portugal, Italy, Ireland, Greece, and Spain), the dollar has gained strength and U.S bond rates have slid as investors seek a haven.
Ironically, gold has traded in line with the euro and the dollar and has fallen from its highs.
Once attention again turns to the United States and its problems, the dollar will weaken again and gold and emerging markets will rebound.
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