We have been talking about the potential for inflation for some time. It really hasn't been a near term concern because a lot of prices were/are falling. Recent activity by the Federal Reserve have appeared to help keep the rates on long-term debt instruments relatively low. However, the more recent pop in rates on mortgages give us the feeling that low rates can't last forever. Sherry Cooper, at the Bank of Montreal states "if the Fed keeps the printing presses running for too long and if the federal government cannot find ways to rein in deficit spending, there is a real risk that by 2011 or 2012 inflation will be a problem." Others take a different view or see differences in the timing. Joe LaVorgna at Deutsche Bank believes "We think forecasters' inflation worries are premature," and that "Only when it appears the financial markets are on a self-sustaining recovery should we begin to worry about reducing the size of the Fed's balances."

Yesterdays article in the Wall Street Journal Online summarized some of this debate well. Because of the jumping yields on government debt, folks have rekindled interest in the inflation-deflation debate. Lately, there are fewer transactions and the velocity of money is weak enough that there have been little measurable effects of inflation due to the Fed's quantitative easing. As quoted in the WSJ article, Economists often linked to particular political affiliations have different views on inflation. Paul Krugman states that we are in a liquidity trap and that "a rise in the monetary base does not lead to inflation." Further, he believes that although government borrowing is massive it does not counter the weak private borrowing. Arthur Laffer on the other hand believes that what he calls "panic-driven monetary policies" may have brutal consequences. This entails rapidly increasing prices, high interest rates and output and employment similar to the 1970's. Laffer also believes that the Fed will not do what is required to stay away from inflation.

A lot of folks are still reeling from the past couple of years. Many feel that Bono's lyric in the song One, "you gave me nothing now its all I got" is speaking about their relationship to the government, banks and many other entities. But one needs to think strategically. While I am not certain about the inflation-deflation debate, I think that the probability of inflation in the next few years, combined with the havoc that it can cause tells me that I should try to hedge against it. While gold is sometimes seen as a throwback device from caveman days, it has appeared to be a good hedge. More recently, instruments such as Treasury Inflation-protected securities (TIPS) may also help you guard against inflation. But I want to live large. If I think inflation is probable, taking on fixed-rate debt and paying it back with cheaper dollars might be pretty fun.

One way to do this is with housing. With still reasonably low levels when looking at mortgage rate histories, I am happy enough to lock into a rate for a home now. In the low-tier price range I am looking at, which appears to be below  trend (excluding the absurd bubble levels), I am comfortable enough without having to time the market "bottom." While I like the shininess of gold and that only a combination of sulfuric and hydrochloric acid can destroy it, I still need a place to live. TIP's while something that sounds like part of a well balanced breakfast may be a good component of a portfolio, I can hardly entertain guests with it. Yes, there are psycic benefits along with financial ones...

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