Thanks for all your very thoughtful comments. I really respect this website and the friendly and very knowlegeable posts here. I learn a lot.
There are a few assumptions that I wish to address.
Assumption #1: if inflation rise, the fed will raise rate.
When inflation rises, there is an increased risk that at a certain critical point foreign investors/governments will turn away from the US economy/treasury at a significant cost to themselves as well although lower. This would cause havoc for the US dollar and economy.
However, if interest rate increases further, one sure thing will happen is the further collapse of the housing market. The risk of this leading to a recession is very high.
In the face of a problematic housing market, what the fed will try to do is to delay increasing rate as long as possible to sail through the housing market problem with the least harm to the economy. This manuever will be at the expense of increasing inflation by not raising interest rate properly.
I believe they do this because they believe the US has room to manuever. That is, to allow increased inflation without comming too close to the critical point triggering outflow of investments. As the world balance between the risk and many benefits of their US investments (which they have been dependent on for a long time), the Fed will play their balancing act.
But it is you and me who will suffer as our cash value will evaporate. Holding no physical assets, only cash or some stock investments like me is no hedge against high inflation.
