It has become fashionable in right-wing circles to subscribe to the idea that our economy will be weak AND there will be inflation in the future. This is possible - look at the late 70s. However, that was driven mostly by supply shocks in a world that was still globalizing and had yet to take full advantage of the supply-chain cost transparency made possible by advances in IT. There was also no ridiculously massive short-term stimulus AND well as a Fed that was asleep at the wheel based on the belief that inflation and recession couldn't coexist.
Things have changed and I don't think we will see a replay of the 70s. Rather I think the stimulus will work. Furthermore, the political powers-that-be in DC are firmly left-of-center and will likely be so for a while, hence every policy decision will err on the side of overstimulus rather than restraining inflation for the foreseeable future (the foreseeable future being Nov 2012 for those in power).
My best guess is that the stimulus will work - I can't think of a time when such a massive deficit spending didn't boost demand. In fact, I think the recovery will be brisk because people have been irrationally pessimistic for some time and will quickly respond when they see that their pessimism has lost them opportunities. Greed will drive a big part of this recovery.
The downside of all of this is that a successful stimulus-induced recovery will lead to inflation - probably not as bad as the 70s thanks to globalization and IT, but it will be a nasty bout of inflation.
The developing world will recover first and will become more consumerist and this willl help drive the US's recovery, but it will also increase import prices substantially - and these are a major driver of inflation.
The problem with a quick recovery is that inflation has a heavy trending component - higher inflation in the previous quarter will lead to higher inflation in the next quarter. I don't think the lefties in DC care about this AND they want a speedy recovery to ensure a smooth 2012 election year (i.e. smooth being defined as Democratic victories). So the pols are aiming for a rapid recovery - and with enough money thrown at the problem they will get it. A rapid recovery will make everyone happy. Prices wil yank back up at first, but that's OK because everyone's job prospects are increasing and business is beginning to boom again, etc, etc. Then because of inflation's trending nature, price levels will continue to rise as the economy's growth begins to moderate. That's when people will say "wait a minute" as they watch inflation outpace economic growth and corrode their purchasing power.
My recommendation is to focus your career and investment strategies on firms with global market reach and solid pricing power. This is one of the reasons I think advertising will be surprisingly lucrative - every firm can boost brand equity and pricing power through good ole fashioned advertising. Put it on the internet and you've got global reach.
