I understand you would like a detailed analysis regarding how we will recognize that inflation has returned? I'd be happy to oblige except that inflation must disappear first before it can re-emerge. You see, inflation is alive in well in the monetary aggregates and the trend towards more money creation is confirmed by that most nettlesome canary in the coalmine, gold. And despite all the efforts to suppress gold by the authorities, it manages to maintain a rather elevated price. Until gold kicks the can, inflation cannot be pronounced MIA let alone dead.
Gold is the ultimate arbiter of whether inflation is lurking in the system, and if inflation were utterly absent, gold would, like the stock market, be trying to avoid being cut in half instead of off a mere fifteen to twenty percent from its all time highs. Furthermore, the weekly technical setup looks like gold is preparing to challenge last year's highs sooner rather than later. That is most strange behavior in an environment where inflation is said to be absent. What's more, I posit that gold isn't merely reacting to the prospective creation of yet more U.S. debt for the purposes of untold domestic bailouts, but to enormous amounts of fiscal stimulus being planned by other nations, particularly the Chinese, who will be spending their massive dollar surpluses to shore up their own faltering economy. We will have to wait and see to what extent they succeed, but it is certainly far too early to bet on their failure as the Chinese are much better candidates than we to hold the line with the sort of neo- Keynesian strategies they likely will be resorting to in the coming months and years.
In a broader sense here is why placing your money on long lasting deflation is a losing bet. Short of a massive die off, recall that despite all the tumult in our domestic markets over the last year and a half or so, that there are still just as many souls on planet earth as there were before sub prime mortgages became part of everyone's lexicon. Six and a half billion souls exist on the planet, and they still need to eat, transport themselves, and generally live, as best they can, their lives. Where and how do we Americans fit into this grand picture? I maintain that the U.S. with its outsized influence in world affairs is well on its way to taking a far less prominent role in the activity of the other 6.3 billion inhabitants of planet earth; I further assert that part of that process will involve the eclipse of the dollar as the world's reserve currency. This will, by necessity, entail a great deal more inflation here in the U.S., perhaps hyperinflation, as this nation is no longer able to game the global system by virtue of controlling the monetary medium of world trade. The day when we are removed from our lofty perch is already in process, and the point of recognition that we are just a hulking monetary leper can come at any time, but like the incipient rise in gold, it will, in my view, occur sooner rather than later. The signs are all around us.