This week, I’ve looked deeply into the issue of inflation, researching what some of the smartest people have to say on the subject.

There are those, like billionaire investor Warren Buffet, who believe that inflation is inevitable: "A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it's going to inflate its way out of the burden of that debt."

Then there are those, like Nobel Prize-winning economist, Paul Krugman, who don’t believe inflation is just around the corner. Although the powers that be have increased the money supply by a trillion dollars, most of that money is sitting in commercial bank vaults as excess reserves and isn't out in the real world creating “inflation” by buying up cars, houses, and flat-screen TVs.

Although in ordinary times, the Fed’s recent actions would cause “inflation," wrote Krugman in a New York Times article, these aren't ordinary times.

“Banks aren’t lending out their extra reserves. They’re just sitting on them -- in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.”

In my opinion, banks aren’t lending yet, but that's likely to change. Think about it in market terms: The short-run situation may be irrational and emotion-driven (banks may fear to lower cash reserves if case additional regulations are introduced), but in the long run, it's the fundamentals that drive prices. Banks have money but want to earn more, so they'll eventually lend it to earn interest.

Nobody can be absolutely sure what the future holds for inflation. In my view, the vast majority of signals are screaming “inflation ahead."

Let’s begin this week’s analysis with the US Dollar chart.

US Dollar

The USD has been trading sideways since its sharp pullback at the beginning of June. Back then, the correction was significant, but only in terms of range -- not in terms of time. It's often the case that requirements of both time and range need to be fulfilled before prices can resume their previous trend (in this case, down).

Please take a moment to study the following weekly chart:



Taking into account weekly closing prices, we're now very close to a resistance level, which, unless we see a confirmed breakout, makes lower USD values in the near term more likely.