I understand the deflationary argument. I think even the deflationists believe we are going to see inflation become a problem, they just think that it will come after the deflationary phase.
Recent history would seem to contradict that theory though. From `03 to `08 we saw inflationary pressures gradually building until they finally came to a head as the tax rebates hit the economy and spiked the price of oil over $147 and the price of gasoline over $4.00.
Combined with the collapsing real estate and credit bubbles these severe inflationary pressures collapsed the global economy and led to the worst recession since the Great Depression. For about 6 months we experienced a severe deflationary period.
Take note that the deflationary period followed, not led, the inflationary period. It seems like a contradiction but inflationary pressures lead to deflation not the other way around. As the price of energy spikes strapped consumers shut down and demand for everything except necessities grinds to a halt. Prices plummet as demand collapses. Deflation!
In order for a deflationary period to spawn inflation we have to have the government print money. Which we have in spades I might add. In order for deflation to begin all we need is for the governement to allow the inflationary pressures to get out of control. At that point the process will complete all on it's own.
Now we are starting the process all over again. I think the completely outsized moves in energy, gold and stocks the last two days compared to the rather small decline in the dollar are suggesting this isn't just a short term top in the dollar.
I think there's a high probability that the inflation trade I've been expecting is about to begin.
This, and not another credit event, is what I think will be the catalyst for the next leg down in the secular bear market and the next deflationary scare.