The road to hyperinflation starts with central banks printing money to finance government spending. But while they can print money, they can't create sustainable wealth. Contrary to what it wants us to believe, the Fed has no exit strategy. Among its initiatives, $1 trillion-plus in mortgage purchases will be hard to unwind, not to mention the promise last year to hold such securities to maturity. More important, fiscal and monetary policies encourage consumers to increase their debt levels in an effort to promote economic growth. In such an environment, if inflation increases, monetary tightening would cause any nascent recovery to stall.

But the Fed may want inflation: If you don't want home prices to fall, try raising the price of everything else. Sophisticated investors can cope with inflation and credit, but using inflation to bail out debtors could increase the wealth gap.

ASCENT OF THE EURO

The day the Fed said it will buy $300 billion in U.S. Treasury bonds, the dollar had its greatest fall against the euro since the euro's creation. Everyone loves to hate the euro, but the European Central Bank (ECB) doesn't want to move interest rates to near zero. These policies resulted in consumers in the core euro countries acquiring less debt than Americans, allowing them to better shoulder a stiff recession.

Many of the euro zone's banks have serious issues. Plus, the fortunes of many businesses in the EU depend on selling goods and services to build Eastern Europe's infrastructure. As a result, it may be cheaper for the EU to bail out Eastern Europe than let it fail; after much bickering, we expect the money to be channeled via the International Monetary Fund. Economic growth isn't always needed for a strong currency; during the Great Depression, countries that debased their currencies recovered quicker. Only when countries have a serious current account deficit is growth required to sustain a currency. And the euro is resilient.

Japan is deep in depression territory, but we're cautious on the yen, since its panic appeal may fade as the world's financial system stabilizes. With stronger leadership, Japan may engage in competitive devaluation. Switzerland is working to ruin its reputation as a safe haven. The Swiss National Bank intervened in the currency markets to erode the confidence in the franc.

The Norwegian krone may become the "new Swiss franc." Norway is a surplus country. When credit is tight around the world, you want to be cash-flow positive. Norway may be the best trade if the global recession turns into a depression.

MORE CONFIDENCE, NOT MORE MONEY

When the U.S. asked world governments to spend 2% of GDP to boost their economies, countries like Germany refused, arguing that the markets need confidence, not money. Smaller, export-driven countries support stimulus plans, but lack the resources, so it's up to the U.S. to take the lead.

Most government efforts have been expensive and ineffective. With a stimulus plan, tax rates and the cost of government borrowing may rise, sending mixed signals to businesses and homeowners. Add the uncertainty over tax and bailout policies, and it's an environment not conducive to growth. As the U.S. tries to reflate the world economy, commodities and commodity-sensitive currencies will benefit. The less industrial use a commodity has, the more sensitive it is to monetary inflation.

Australia's dollar should benefit from reflationary efforts, so too the Canadian dollar, but its exposure to the U.S. economy will keep that exchange rate volatile. The ultimate beneficiary may be the Chinese yuan. China, unlike the U.S., can afford its stimulus. It's taking small steps to allow a free-floating currency and will only act when it thinks a stronger yuan is in its self-interest. As inflation increases, China may need to allow its currency to appreciate. Currency isn't only a medium of exchange, but also a store of value. As more central banks are tempted to devalue their currencies, investors may want to take a diversified approach to cash.

Axel Merk is founder and president of Merk Investment in Palo Alto, Calif.