"...In an environment where there is more ‘high powered money’ in the market than there are investible securities, there are two possible outcomes. One is that the remaining cash which doesn’t get invested ends up being added to the money supply. This leads to a situation where more money chases the same amount of goods, which reduces the currency’s purchasing power and creates inflationary consequences on consumer prices. It also reduces the incentive to hold fixed income securities. C’est le scenario de le goldbug.
The other outcome is that the additional cash refuses to budge into the wider money supply and is instead used by investors to bid over the market price for whatever investable securities are left. This is the equivalent of voluntary capital destruction — you know you are overpaying because you’re going to get back less than you originally put in. It’s worth it because you think there’s nowhere else to hold your money safely. In this scenario, the purchasing power of the dollar is also reduced — but only in terms of high-quality fixed income securities. In the realm of consumer goods the purchasing power of anyone who can covert Treasuries into cash grows. The incentive to hold fixed income securities is thus increased. C’est le scenario de Paul Krugman – le liquidity trap.......
If Krugman’s theory is correct, then everything you thought you knew about gold prices, Treasury yields and commodity curves no longer applies. It’s been flipped through the looking glass. "
http://ftalphaville.ft.com/blog/2011/09/07/671611/through-the-looking-glass-with-us-treasuries-and-gold/This article is very good at explaining the argument of are we experiencing inflation vs. deflation.