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I agree with leslie with regards to the inflation outlook. I consider the likelihood of severe inflation in the short to medium term as low. Money supply growth in Canada and the US is relatively slow because many banks are being slow to extend new loans and sitting on their capital. (Even though the Canadian M1 narrow money supply expanded by 15.4% in the year to August 31, 2009, the broad M2 or M3 money supply expanded by only 2% in that same time period.) Please remember that most Canadian dollars are not created by the Bank of Canada, but by the commercial banks.

In the medium term, the likelihood of high inflation is low because of the large amount of slack (unemployment and capital operating far below capacity) in the economy. Until unemployment approaches the "natural" unemployment rate, wage and salary demands are likely to remain subdued, meaning that the probability of an inflationary wage-price spiral is low.

As for why XRB declined 20% last October, I would note a few things. XRB has a high duration since its holdings are long-term government bonds; thus it is highly sensitive to changes in long term interest rates. Real return bonds only provide protection against inflation, not a massive yield spike caused by investors dumping their holdings for US t-bills. There is no real protection against a market crash other than holding cash. Cash earns you little, if anything at all. Also, I wouldn't really try to guess when a crash is going to happen. Consider last fall. Economists and analysts who should have had some idea what would happen in the event of the collapse of Lehman Brothers were caught flat-footed.
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