What you need to do is dust off your old common sense and a small macro econ book and start thinking.
1. First look at the data: What Treasury bond pays ENOUGH to cover inflation?
2. So where are the bond vigilantes?Answer: They don't wanna stand in the way of the crowd.
As Walmart pays US$ to the chinese subcontractors, the Chinese subcontractors must recycle the profit back into the currency that has the most liquid investments. Hint: What Treasury? :D3. So will a recession fix the problem?
Not necessarily, "investment thesis" may stand in the way. Read what Warren Buffett has to say about it:
Buffett: "I don't think there's a bubble in agricultural commodities like wheat, corn and soybeans (I disagree, but let's go on). But in metals and oil there's been a terrific [price] move. It's like most trends: At the beginning, it's driven by fundamentals, then speculation takes over. As the old saying goes, what the wise man does in the beginning, fools do in the end. With any asset class that has a big move, first the fundamentals attract speculation, then the speculation becomes dominant.
Once a price history develops, and people hear that their neighbor made a lot of money on something, that impulse takes over, and we're seeing that in commodities and housing...Orgies tend to be wildest toward the end. It's like being Cinderella at the ball. You know that at midnight everything's going to turn back to pumpkins & mice. But you look around and say, 'one more dance,' and so does everyone else. The party does get to be more fun -- and besides, there are no clocks on the wall. And then suddenly the clock strikes 12, and everything turns back to pumpkins and mice."
and of course from yesterday, the issue of "paper/electronic commodities":
Washington, DC - The Senate today unanimously approved a measure offered by U.S. Senators Dianne Feinstein (D-Calif.), Carl Levin (D-Mich.), and Olympia Snowe (R-Maine) to close the "Enron Loophole." Since 2000, this loophole has exempted electronic energy markets for large traders from government oversight. The measure was approved as part of the reauthorization of the Commodity Futures Modernization Act.
The legislation would increase federal oversight authority to detect and prevent manipulation in U.S. electronic energy markets, create an audit trail, and increase transparency. The measure includes language to reauthorize the Commodity Futures Trading Commission (CFTC).
4. What happened if there CONTINUES to be runaway expectation of inflation, at the time when the government maintained through the CPI that inflation is very much under control?
Very tough question with and I am not willing to show my cards.
1970s spiral happened because policy could never caught up with the ways workers were frontrunning inflation by asking more money, and caused more inflation in turns. These days they say they can layoff everyone and ship the work to Chindia. Or can they?
This is where the entire confidence game is played, by various theories propagated by hedgefunds, but usually falls under the category called "Decoupling Theory".
The answer is clear to me from comparing a) GDP sizes, b) future expected growth, and c)direction of trade/imbalance. But I will let you decide for yourselves why you should go one way or the other, so that I don't deny the Devil their due when it comes to collect their well deserved human sacrifices. Good luck.