Many prominent and respected pessimists (a.k.a. realists) like Nouriel Roubini are not concerned about inflation, instead they applaud lower interest rates and government intervention as necessary to restrain the chaotic forces of the free market and valiantly battle the ominous perils of deflation. They are right, but only after they are very wrong, let me explain.
Throughout the Vietnam era gold was fixed at $35/ounce despite rampant monetary inflation aimed at funding imperialist projects abroad – Americans wanted both guns and butter, remember? The end result of course was the disintegration of the Bretton-Woods agreement and a surging price of gold that still until this day gives cause to doubt the ability of central bankers to maintain the value of paper currency over time.
Can somebody please explain how the US dollar is any more attractive today than it was 1 year ago? Nobody in their right mind believes the banking crisis has bottomed, we haven’t even seen the Option ARM resets, the right-downs on student loans and auto loans and credit cards, the mass wave of baby-boomers set to retire, peak oil, the result of soaring inflation and a Federal debt with an average maturity of less than 3 years. We haven’t seen the bulk of our more serious problems – and critically, most of these problems originate in the US – so how could the currency of a bankrupt nation be seen as a safe haven? It’s preposterous. The last few months can’t possibly be anything more than a dead cat bounce, it’s a sucker rally.