All the money used by central banks around the world to rescue the financial system is causing an increase in government liabilities.
In other words, they are printing money.
Though in the short run the fixed income markets (bonds/interest rates) are worried about deflation (a decrease in inflation), in the long run we are looking at inflation down the road. The expensive war, building projects and expanded social programs launched by the Bush administration would normally lead to inflation, since government debt expands at a rate faster than the economy can keep up. if you add to that the massive amount of money being created and injected into the financial system, we are talking about some real inflation coming down the road.
This inflation is not all bad. The value of a dollar will drop as prices and salaries increase. But mortgage balances will remain the same. Thus banks and borrowers will be let out of their debts through inflation.
So what should an investor do besides speculating in gold?
I for am buying TIPS (Treasury Inflation Protected Securities). Currently 20 year TIPS pay around inflation plus three percent. That means that if inflation comes in at 5%, the bond pays 8%. Taxes can be a bit complicated if you own the bonds directly and outside of a tax deferred account like an IRA, so for my taxable accounts I prefer to use the ETF (exchange traded fund) TIP (TIP – $95.81). TIP holds a portfolio of Inflation indexed bonds but pays out the entire coupon so you know exactly what taxes to pay.
Disclosure: I own TIPS Bonds in my IRA. I own TIP in my taxable account. It is now my largest holding. I started buying at 101 and have been buying all the way down to 96.