Deflation is the fear not inflation.

Investors seem to be catching the onto the falling domino theory as the Euro Zone is sinking under the weight of higher interest rates and proposed fiscal austerity.  Today, the major headlines of U.S. job growth and Spain have dwarfed  another example of European citizens refusing cuts in their standard of living.  Ireland’s citizens have voted against harsh austerity and more backlashes from the population from other European citizens in the region are expected.  The United States, China, or India does not appear to be immune to the spreading virus of deflation.  My future fear with holding government bonds is that while investors are rushing to the safety as they provide some yield as short-term interest rates are near zero, the ability of governments around the world to continue to fund stimulus by borrowing to offset the lack of private economic growth cannot end in a positive way.  As a few European countries have found out, you cannot spend your way to prosperity.  Bond investors in Portugal, Ireland, Spain and Italy have watched bond prices sink under the weight of government budget deficits to bailout banks and the economies in the region.  Most citizens now are as addicted to fiscal spending as an addict is to heroin.  While you may get short-term relief, you will face the long-term effects of the decision to avoid feeling the short-term pain. The last comment may offend readers, but government bonds will not end up being the place to be as they are in a “bubble” now. 
Historically, interest rates in the United States need to offer 3% just to offset inflation. So while you have "enjoyed the ride" while investors have been focused on lowering inflation, deflation will in the end hurt bond prices more as governments will end up not being able to pay.  What is the end game here?  As citizens, we should be tired of talking about government and central banking stimulus.  The result has not been an improvement in unemployment.  The only answer is the tough medicine of liquidation of debts by a combination of defaults, bankruptcies, and austerity with spending cuts in both the public and private sectors. The only other way  to solve this crisis is a fresh start with employment growth in the private sector.  If businesses hire, then the public can regain a balance sheet that can be able to rebound from the ashes of past policies.  My fear is a lot of economic pain and a change in leadership is needed at the governement and corporate level before a turn is in sight.