Inflation vs. deflation

The battle between equities giant Warren Buffett of Berkshire Hathaway and PIMCO's Bill Gross, the biggest bond fund manager, will be decided on whether inflation or deflation win out going forward. Buffett has increased his position in short-duration Treasuries, betting that inflation will cause longer-dated Treasury bond yields to rise. Gross is betting that long-term T-bond yields will continue to decline, as global economic growth declines, causing deflation.

http://www.zerohedge.com/article/buffett-vs-gross-or-inflation-vs-deflation-who-right

My guess is that both will be right. Long-expiry T-bond yields will continue to decline short-term in a low-growth environment, and demand for credit will be muted. However, as economic conditions continue their descent, central banks worldwide will inject liquidity in an attempt to stimulate their economies. The opposite effect will occur, as paper currencies are further debased, diminishing the standard of living for billions. Monetary stimuli will inevitably increase the prospects of inflation, especially if the velocity of money accelerates. The bond vigilantes will sense weakness in various foreign currencies, pushing up sovereign debt yields.

With the global economy intractably connected, sovereign debt crises will leapfrog from country to country, eventually reaching the shores of US, while the reserve status of the US Dollar will come into question.