One factor in T-bonds staying high is that the Fed, in addition to buying bonds directly has created an internal dollar "carry trade" to help finance the Treasury borrowing. A bank can borrow from the Fed at next to nothing and use that money to buy T-bonds at 2-4%. This a guaranteed safe, profitable trade so long as the music doesn't stop. With a carry trade like that who needs to lend to risky private borrowers such as consumers or commercial accounts?

Deflation has occurred because federal reserve notes (cash) are not the only purchasing media, credit creates purchasing media and with the continued decrease in available credit, overall purchasing media has decreased. So demand destruction occurs and prices fall despite a huge increase in outstanding federal reserve notes (as marked by the unprecedented rise in Fed assets).

Historically, hyperinflation in a fiat currency occurs when about 40% of government expenditures are financed by borrowing, we are about there now.

So I think we are on the edge of hyperinflation despite the deflation caused by credit contraction. I think we are one failed Treasury auction away from the real flight from the dollar.

I am short the long T-bonds and long gold, but not a gold trader. My average cost of gold now is about $640 an ounce so I've always had some gold position but added to it in recent times (up to the start of 2008).

My dilemma is, at what point would I sell gold? At the point where the Fed and the Treasury and Congress return to sound fiscal and monetary polices.

At what point would I exit the short Treasury position? When long term rates are about 9%.

Meanwhill I'm averaging into a short SPY position. When interest rates start to surge, i.e. the music stops, I think we could retest the March lows. I think it's only a matter of time.

This whole mess will not go quietly into the night. It's here to stay for years. Prepare yourself and your family for tough times that are surely forthcomming. Stock up on the essencials, food / amunition / temporary shelter and have an evacuation plan that includes a remote location. Keep your vehicles in good repair and full of fuel, ready to leave in seconds. If I'm wrong (and I hope I am) you can just eat the food and drive the gas out of your car

I would have to differ on one point: I don't see inflation a threat as much as I see it a necessity for a country as deeply in debt as we are. I don't mean just the Federal Debt. The Federal Debt has been higher but not when everyone else was deep in red ink. The Total Debt of the Non-Financial Sector is the benchmark to watch, not the Federal Debt. We have a serious debt problem hanging over our heads which will require some inflation to manage unless we are able and willing to drastically alter our lifestyles. We can quit importing and consuming massive amounts of wealth AND export what we used to consume or we can inflate our currency. Deflation is a possibility but the consequences would be so serious the Fed will do everything in its power to insure it stays only a possibility.

Joseph Lazarro the writer of the article says "It's too soon to tell". That is not correct.
The train has already left the station and it is on tack 9 heading to "Deflation". Back in the mid to late 1980's Japan's economy took a downturn and they also lowered their interest rates to near Zero and held them their for 20+ years and inflation remained under control. Japan has been stimulating their economy one way or another since the mid 1980's to late 1980's and they still cannot get substantial economic growth.
Nothing controls inflation better than High Unemployment and Low Demand. Based upon the fact that 45 million senior citizens will not be getting a cost-of-living increase along with the 10 million or so federal civil service retirees and military retirees and railroad retirees and their health care plans are going up an average of 8% for those 54 million people. Thus those effected will have LESS money to spend in their pockets in 2010 than they had in 2009 and that will control inflation and help to create full blown deflation. Mr. Lazaro mentioned oil prices__forget oil, the World is awash in oil and more new major oil fields are being discovered all over the World every month now. The number of oil producing and exporting countries is increasing every year. People seem to forget oil comes out of the ground for FREE, just like with a drinking water well. Sure Gold could go up____but when have Gold Bugs ever been rational? Inflation can only be created by "Consumers with money to spend" and for now all we have is consumers with empty pockets and too much debt already. I have to wonder if anyone is really prepared for the downturn of Biblical Proportions that lies in our path ahead.

By definition the ultimate result of the huge increase in dollars that is about to occur must ultimately end in
inflation.

Milton Friedman preached it and no one can refute it no matter how many convoluted theories are invented in an attempt to prove that "this time it's different."

I worry about stagflation. IMO the gold price current rise reflects historically low interest rates (caused by governments' somewhat inflationary, liquidity-maintaining deficit economic stimulus) combined with a scarcity of acceptable risk US real estate opportunities and a scarcity of acceptable risk goods- and services-providing US investment opportunities (a somewhat deflationary economic environment). US tax revenues are down, and locally I observe retail inventory decreased depth and decreased diversity. IMO stagflation (i.e., emptying retail shelves buoying prices in a deflationary environment) could result if Federal budgetary constraints prohibited further liquidity maintenance by deficit economic stimulus. Richard Ballard www.myspace.com/rjballard

the big d is on the way.bye bye

Might as well say both. the only reason gold is up is so the rich can sell theirs and make money. Since there isn't any other way unless your government worker to make money. There isn't a company any where in the world right now that isn't over inflated on its worth. Which in turn makes impossible for anyone who has to work for a living to get higher wages. Call that deflation of the worst kind. That ripple effect will last for years. And call the next wave of tax increases or usable tax deductions the inflation. They will get their money any way they can. The government sector and the ceo,coo, name plate sector are the only areas where pay is increasing. So how do they get the money to pay their salaries. By inflating everything the middle class buys. Funny how the wealthy think they can keep their lifestyles going until the middle class stops buying their BS. Then all the wealthy people products move into the middle class products trying to make thew middle class feel more worthy. And all the stupid people buy into this. Make a difference before you buy anything know where it comes from and stick it to the elite.