A new Gary Shilling forecast is for even lower treasury bond yields and general deflation. He and Peter Schiff argued on the direction of interest rates in December, 2010, with Shilling saying the 10 year would go below 2% and Schiff saying it would go above 4% and approach or even go above 5%. Clearly, Shilling was right, but was he right for the right or wrong reasons? Seems to me that the 10 year yield went to 2% due to fed purchases driving down rates, NOT deflationary forces pricing in a future inflation level of 2% or less. However, more recently, yields have stayed low because of the flight of capital from Europe, and deflationists like Shilling and Mish can point to a fall in commodity prices and other items to support their case. Regarding Shilling, he seems to think the ability of the fed to monetize the debt is restrained due to its unpopularity. But clearly, such monetization will be begged for when people feel the pain of deflation. Can anyone add to what Shilling and other deflationists have said to argue that the fed either won’t, or can’t overcome deflation by monetization? Need we look no further than Europe resolving its problem to know what we are going to do, given the pain of austerity and resistance to monetization coming to a head? The bottom line is that we don’t know what we will have for sure, deflation or inflation, but the more we know about the nuts and bolts and anticipated policy, the better an allocation we can give to one versus the other. I won’t go less than 30% chance of one or the other at the present time, but and am weighted more heavily in the INFLATION camp as its pain is slower in arriving than deflation IMO.
BTW, my belief in high/hyperinflation is for a few years from now. We could have biflation first I agree (I don’t think food at the store will go down at all). The crux of my question centers around the reasoning of Gary Shilling as to why he thinks Ben won’t be able to defeat the forces of deflation.