When a currency devalues it looses purchasing power. It takes more of them to buy the same goods. If the dollar devalues against another currency it takes more dollars to buy that currency. Then if you buy something that is produced in the other countries currency it costs more in US dollars. Prices rise because the value of each dollar is worth less. Think precious metals, farmland, Canadian dollars, commodities right now. You want your wealth in hard assets. People on fixed incomes and fixed wages get hurt because their dollar will buy less while their income remains the same. Those more affluent and able to transfer their wealth to hard assets can protect themselves to a better degree. Farmers as a group usually fare pretty well in inflation. It is the after effects (the 80's) that get them.

When assets devalue, the dollar will buy more of those assets (think housing and commercial real-estate right now). In a deflationary environment it is best to hold cash (dollars) or treasury bills because you can buy more with your dollar tomorrow than you can today. That has been true for real-estate for the last couple years. Construction machinery has been a bargain. If we are truly in deflation and expect deflation in the future the place to be is in cash and treasuries. A lot of people believe that right now.

Personally I think treasuries and bonds are in a monstrous bubble right now, the bubble that replaced the blown up mortgage bubble and the currently deflating commercial real-estate bubble. Lots of liquidity in the system looking for a safe place to land (both foreign and domestic) and treasuries and bonds are where it landed. The stimulus was supposed to make the banks healthy so they would start lending again. At least that is what the powers that be told us. My belief is that they knew the banks would not lend but would take the guaranteed government provided profit and put the excess reserves in government bonds, thereby keeping the merry-go-round going and saving the banks and their bondholders and keep the market going for government paper.

All we need is some systemic shock, either domestic or foreign, that would shake confidence in the US governments ability to honor their debts (treasury bonds and bills) and things will get wild. The huge amount of dollars currently resting in "safe (that's a laugh)" treasuries will look for protection elsewhere.  If you look at the size of the bond market compared to any other market there is (stocks, precious metals, farm land, whatever) it is huge. If only a fraction of that money spooks and all tries to crowd through the exit at the same time......... Katy bar the door.

Then is when we will see $200 oil, $20 beans, $2000 gold, double farmland prices, etc. We could see attempts at price controls (they never work) and currency and precious metals restrictions (can't move your assets off shore to protect it). It will be inflation like we have never seen before and it will happen quickly. The writing is already on the wall. It might be a week from now or they might be able to keep the musical chairs going for another ten years, I sure don't know when, but it will happen (I tend to think earlier rather than later, as within the next couple years). There are people 20 years ago that predicted what we are in right now, they were just way early on their predictions. Ponzi schemes can go on for a long time. Look how long Madoff kept his going.

99 out of 100 people will not believe what I have just written and that is fine. We all have to choose our own path. My prediction is worth exactly what you paid for it. My only suggestion is to read some financial history and decide for yourself how these situations nearly always turn out. Paul Volker salvaged the dollar in his day to keep it from going up in smoke but there is no one in office now that would take that kind of heat. They will ride this horse till it is dead.

John