Perhaps the greatest debate over the economy this year has been whether the U.S. is in for a period of inflation or deflation. Those who fear inflation point to the recent rise in the price of Treasury Inflation Protected Securities. TIPS, as they are called, are U.S. Government bonds linked to the consumer price index. In an inflationary environment, investors in TIPS benefit.

Besides that, the Fed has come out and said, in no uncertain terms, that inflation has been too low and that something would be done, sparking more fear of inflation.

But Gary Shilling, president of A. Gary Shilling & Company, argues that the real threat is not inflation, but deflation. He says that supply generally exceeds demand these days, driving prices down. If you combine that with slow economic growth in the U.S. in the years ahead, Shilling says the result will be deflation.

What about the next round of quantitative easing (QE2) expected in early November? Many believe that further stimulus to the economy could lead to inflation, especially if it is not carefully done. Shilling, however explains why it won't make much difference.

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