I wrote this on the gold, inflation and deflation page. I think I am somewhat incomplete here in my thoughts, but the idea is this is a poker game and the cards are debts and the chips are dollars. As the chips go from one side to the other, the relative betting activity slows. If the chips themselves are dependent on the debts, both could shrink and the number of makable hands also shrink, like a missing ace diminishes the chance for 3 aces and eliminates 4 aces. Gold can get you more chips, but you can't get in the game with gold. The guys that owe the debts are the missing cards and the bankers are getting dealt the hands that need the missing cards. Only the banker can prop up the price of assets outside of the game and he is playing hands that have a greater chance of losing as time goes on. The game is played with dollars, not Euro or yen.
Those betting on the death of the dollar are going to find out differently. We are in a deflation and in a deflation, anything that looks like money is going to pass. What else can they use? Has the world been collateralized by Euros?. What about Yen?. Then we have the yuan? You couldn't use the yuan for toilet paper if not for the store of dollars they have in China.
Bernanke may be onto something, but nothing is going to work until they resolve the big banks. It isn't just the big banks in the US that need to be resolved, but all over the world. There is going to have to be enough money to replace the bad debt on the balance sheet. So, in part he is doing it backwards.
Those that believe the US is finished and China is the king of the world have been reading too many headlines and not looking under the hood. China is a pissants go cart against a Harley. This might not be the case in 50 years, but it is today and China is not only tied to the dollar, but if the flow slowed it would collapse. Little is said about the flow of hot investment money into China and everything focuses on trade. Whereas the US has its debt issue and its QE to use against its creditors, China has what amounts to trillions in foreign investment and most likely capital controls in both directions. What does China use to buy oil and all the other minerals they import in huge quantities?
Lysander Spooner, a very intelligent man of his time and an early anarchist in his old age pointed out something I have believed, but never had confirmed until I read his quote. He said that the value of everything in the form of commodities fluctuated, but the value of money was in the payment of debt. Note the term in the Constitution that "No State shall make anything but gold and silver a tender in payment of debt". Many think this means that gold and silver were to be the only money, but Spooner said that it was to maintain value in contracts and little else. Thus, "This note is Legal Tender for all debts public and private" means something.
There are several debt out there. I believe the most important debts aren't those owed to the banks, but those owed by the banks, including debts owed from one bank to another. Banks have been using their own IOU's disguised by phony bank capital. Once a few big banks appeared to be impaired, the system froze up. Bernanke gave them something to pay, then had to make the temporary actions permanent in QE1. Most of the Federal Reserve money in the banking system was gone, in the form of Federal Reserve currency in hoards around the world.
The Fed isn't going to solve anything with QE2 because when they produce money, they take an asset out of the system and replace it with a money asset. I suspect the Fed is moving out on the yield curve to produce income, an idea which is foreign to most folks, but in essense what they are doing is the same as the Chinese are doing. If trade is such a problem with China, why is China hoarding our money and producing currency with it, while at the same time building excess steel capacity when they could buy steel from the US? Could it be they need safety from the excessive financing they are doing themselves?
As for gold? Gold is going to be great if the worlds currencies totally blow up, but food and guns might be much better. There is a squeeze going on few people understand. In the realm of CPI, gold is a $300 to $600 asset. In terms of delusion, it is a $5000 asset. People and entities are going to need cash and being cash isn't earning much income, people are going to be forced to either hoard their money or spend it. If your pockets aren't deep as a holder of gold, you are likely going to find yourself liquidating your gold in a weak market. Capital gains are another term for inflation over time in most assets. The only other reasons are proper timing and good judgment, both of which are a good portion skill and a roughly equal portion luck. A marginal amount is real return which is effective inflation. Credit and debt are going to be more deflationary and income destroying than most realize. Converting assets to cash isn't going to change the result much. When time comes to liquidate gold in order to live, you won't find too many buyers, as the entire economy of the world will be caught in a strangle of debt (bankers will be caught on both sides, owning their depositors and being owed by those that can't pay) and low demand.