Sometimes, after a long day, I end up muttering to myself. The latest incident followed a meeting in which I was asked to prognosticate on the likelihood of inflation.

I won't tell you what I said, but I will let you in on the internal debate (read: mutterings) that followed as I second-guessed my remarks. The questions raised after my talk forced me to look at both sides of the issue in a new light. After all, just as there's a case to be made for inflation, there are also some reasons for believing we're headed into deflation.

We, in fact, estimated the probabilities of inflationary/deflationary scenarios last summer in "Laying Odds On Inflation." Back then, we gave the statistical edge to inflation.

That was a purely mathematical exercise, leaving many readers wondering about the fundamentals behind the numbers.

Behind The Numbers

By now, readers of Hard Assets Investor are familiar with our daily monetary inflation readings. Derived by measuring the strength of the U.S. dollar against gold and the world's second reserve currency, the euro, our real-time indicator's been on an upward—albeit ragged—trajectory since November 2008.

Real-Time Monetary Inflation

If nothing else, the declining exchange value of the greenback reflects a fear of higher inflation in the U.S., and underlying these expectations is the liquidity poured from the Federal Reserve's helicopters over the past 18 months. Yes, there has been a lot of money pumped into the banking system. But if you believe that the money supply ultimately determines price levels - at least as measured by such metrics as the Consumer Price Index—it may seem like you've been waiting a long time to see the inklings of inflation. The oft-quoted definition of inflation—"too many dollars chasing too few goods"—hasn't quite played out, despite the Fed's open liquidity spigot. There have been plenty of dollars, but there's also been a countervailing surfeit of goods. Ergo, core inflation has remained remarkably stable.

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