If I was a conspiracy thinking kind of guy I would say the Fed is talking so much about deflation just to keep everybody off guard so they can inflate the money supply and catch everyone off guard. For inflation to work it has to be unanticipated. If everyone anticipates it they tend to buy everything in advance (stock up 6 months supply of soap and toilet paper as the examples you gave). You can benefit from inflation if you know for sure it is coming and once the public catches on it doesn't have as good of an effect for those that gain most from the inflation (the first users of the money). To gain from inflation you need to spend the money early in the cycle (before the prices go up). If you can do it with borrowed money, so much the better. High flying farmers (they called them "Young Tigers" in the farm magazines) in the 70's were doing great at it buying land with levered up purchases and as the previous purchases inflated up use the inflated collateral to lever up more and it worked great till Volker raised interest to 20%, land prices crashed and many found themselves under water (just like the current housing bubble). Farmers learned the inflation game all too well and it worked for them till the inflation ended and went backward. Then the bubble popped. If only they would have known when to "get out".

The above was not the thought. Here it comes.

What if gvt bonds are in a bubble. Foreigners are holding them. Retirees are holding them. Banks are holding them as reserves (buying short at 0%interest and lending long in gvt bonds to the Fed). What if there is some "event" that shakes confidence. Maybe a default by Greece and Ireland creating a monetary crisis in Europe. Maybe Russia starts dumping US bonds and buying wheat. Maybe the American public wakes up from Bernanke hypnosis................ who knows what but there is a shock to the system. People start exiting their bond positions in substantial numbers. If the Fed does not intervene bond prices will drop (interest rates up). Of course the Fed can't let that happen because the US could not stand the higher interest rates on the new bonds they HAVE to issue to pay for the deficit. So it is monetized by the Fed buying the bonds to keep the prices up. See where this death spiral is going? Ok but that is not the point.....I digress. The point concerns inflation. Here comes the point. When holders get out of bonds, where does the money go? Stocks maybe. Sounds shaky to me with the markets such as they are. What if all those bond sales go into something like wheat, gold, corn, oil, gas, farm land, soybeans, silver........ hard assets.

WE DO NOT HAVE TO PRINT A SINGLE EXTRA DOLLAR TO HAVE INFLATION. A bond market crash, turning all those dollars loose worldwide on hard assets is all it would take. The paper money is already there. All it has to do is seek a home other than in cash/treasuries.

John