You're not going to believe this: Inflation/deflation debate still alive?

[Charles Mackay]

Re: You're not going to believe this: Inflation/deflation debate still alive?

And here is some more regarding the BIS's comments by the departing chief economist: Dr. Bill White. He has nothing good to allow for Alan Greasepan

http://www.telegraph.co.uk/money/mai...0/ccbis130.xml

Jim, I've read all these latest pronouncements by Barclays, RBS, BIS etc. and have been trying to figure out just what it all means. I understand that BIS came out a few months before the Sub Prime crisis in 2007 with warnings and a recommendation to buy the Yen in a carry trade unwind. They in effect announced the August crisis in advance.

It appears to be quite a pissing contest.. apparently Europe has been stuck with a trillion in bad paper passed off by the US banking con artists. The article said they'd already written off 800 billion $.

They also are not willing to follow the US down a hyper inflationary path and in no uncertain terms have broadcast that they will do the right thing and raise rates to arrest the inflationary spiral that we are now in. They know they have the US in between a rock and a hard place and are going to squeeze us hard.

I think this is a huge story and probably THEE "great game" to follow right now. It's Robert Zoellick, Paul Wolfowitz, and Ben Bernanke (The IMF, the World Bank, and the FED) against the EURO and the BIS.

[GRG55]

Re: You're not going to believe this: Inflation/deflation debate still alive?

...They also are not willing to follow the US down a hyper inflationary path and in no uncertain terms have broadcast that they will do the right thing and raise rates to arrest the inflationary spiral that we are now in. They know they have the US in between a rock and a hard place and are going to squeeze us hard.

Methinks the ECB is getting too much credit. Far too much credit.

Do you really think the ECB tweaking its administered rate upward [and that is nowhere near certain yet] is going to do anything material to deal with, or protect Europeans from, the inflation that stalks the planet?

Has the ECB really been any less profligate than numerous other Central Banks? Or does it look good only in comparison with the Fed?

Last Updated: Tuesday, 18 December 2007, 23:16 GMT
ECB lends $500bn to lower rates

The European Central Bank has allocated 348.7bn euros ($502bn; £249bn) to banks at a below-market rate in a refinancing move to ease tightened credit markets.

It is one of five central banks that have injected billions in emergency cash into money markets...

...The two-week ECB refinancing operation is the first time it has said it would offer banks unlimited funds, above a certain interest rate, since 9 August when the credit crisis started...

...The size of the offer surprised some analysts. "The sheer magnitude of the operation caught the market off guard," said Win Thin, a senior currency strategist at Brown Brothers Harriman...
http://news.bbc.co.uk/2/hi/business/7149329.stm

[Charles Mackay]

Re: You're not going to believe this: Inflation/deflation debate still alive?

Methinks the ECB is getting too much credit. Far too much credit.

Do you really think the ECB tweaking its administered rate upward [and that is nowhere near certain yet] is going to do anything material to deal with, or protect Europeans from, the inflation that stalks the planet?

Not as much as gold is! . You're right, just in comparison with the corrupt FED they are.

I see tonight that Goldman has followed with a left jab.. recommending shorting European stocks "in case of a crash" :p

http://www.bloomberg.com/apps/news?p...Neg&refer=home

[bart]

Re: You're not going to believe this: Inflation/deflation debate still alive?

Methinks the ECB is getting too much credit. Far too much credit.

Indeed. Better than the US - yes. Much better - no way.

Their M3 bottomed in mid 2004 at about 5% growth rate and probably peaked at over 12% last September.

Their credit creation (MFI) numbers are also similar and similar to the US - a bottom in early 2003 at about 2.5% annual growth rate, and a likely peak in Jan 2008 at about 11% growth rate.

I also have a blue light special on some ocean front property in Idaho for anyone who believes their CPI is being correctly reported at under 4%.

There's this too:
Europe’s Ailing Social Model: Facts & Fairy-Tales

[Charles Mackay]

Re: You're not going to believe this: Inflation/deflation debate still alive?

Indeed. Better than the US - yes. Much better - no way.

I think the war of words that is developing is the most interesting aspect of this rash of articles. On the other hand, the U.S. collapsed interest rates to 2% with inflation at over 7% (according to John Williams) so the ECU is definitely protecting it's currency better than the Fed. That really cannot be questioned, although I certainly agree that they don't hold a candle to the protection of real money.

[bart]

Re: You're not going to believe this: Inflation/deflation debate still alive?

I think the war of words that is developing is the most interesting aspect of this rash of articles. On the other hand, the U.S. collapsed interest rates to 2% with inflation at over 7% (according to John Williams) so the ECU is definitely protecting it's currency better than the Fed. That really cannot be questioned, although I certainly agree that they don't hold a candle to the protection of real money.

Truth, and it's just all part of the "game".




In other words, it appears that we agree that the competitive devaluation and tariff etc. games gets fought in financial and war-of-words areas too.


That 7% number you noted from John Williams is only adjusting per the pre Clinton methodology. The full correction when the 1982 methodology is used is running around 11.5%.

The ECU is indeed protecting their currency a little better, but also do take into account:

• Their yield curve was inverted for almost the full first half of 2007 and its a reasonably good predictor of a future recession.
• Their current 10 year bond is at 4.03%, almost identical to the US 10 year TNote.
• Their current 3 month eurodollar rate is 3%, only about 1.2% higher than the US 3 month TBill.
• They say their CPI is only 3.7% in the most recent data I have, but some incomplete research I'm doing shows is to be at least 6.2-6.8% and probably higher - perhaps as much as 8.5-9.5%. To state it another way, their interest rates are negative too.
• Their GDP growth rate has been falling rapidly since early to mid 2007 and per the last report is only about 2.5%.

[Jim Nickerson]

Re: You're not going to believe this: Inflation/deflation debate still alive?

Here's a bit more, and it looks to me the ECB is serious.

"Jean-Claude Trichet, the bank's president, has warned of an "acute risk" of a wage-price spiral unless inflation is wrung out of the system."

http://www.telegraph.co.uk/money/mai...1/ccecb101.xml

Stagflation grips Eurozone as interest rates look set to rise

By Ambrose Evans-Pritchard, International Business Editor

Last Updated: 1:20am BST 01/07/2008

Eurozone inflation surged to an all-time high of 4pc in June despite worrying signs of a slump in manufacturing, confronting the European Central Bank with the toughest challenge since its creation a decade ago.

Soaring oil and food prices guarantee a quarter-point rise in interest rates to 4.25pc on Thursday, further widening the gulf in rates between Europe and America.

The only question is whether the ECB opts for a "one-and-done" move or sets the course for yet more rises in the autumn.

Jean-Claude Trichet, the bank's president, has warned of an "acute risk" of a wage-price spiral unless inflation is wrung out of the system.

But a growing chorus of critics fears that overkill could tip the eurozone into a severe downturn at this delicate juncture, and risk a dangerous chain of political events in southern Europe and Ireland - where voters have already thrown the EU into chaos by rejecting the Lisbon Treaty.

The Irish economy contracted at a rate of 1.5pc in the first quarter and is now facing the worst recession since the crash of the mid-1980s. Investment fell 19.1pc. House prices have now fallen for 15 months in a row.

Spanish premier Jose Luis Zapatero was forced to reassure his nation's media this weekend that he was still on speaking terms with his finance minister Pedro Solbes, who has refused to endorse the government's economic crisis plan.

Both Mr Zapatero and Italy's Silvio Berlusconi have lashed out at the ECB in recent days, but even Germany's finance minister Peer Steinbrück has begun to question Frankfurt's hard-line policy.

"An interest rate increase could have a pro-cyclical impact at a point when the economy is slowing down," he said.

The comments come after five months of falling orders in Germany, the worst run since the early 1990s. Siemens, Volkswagen and other big industrial exporters have begun to cut jobs.The ECB has held rates steady at 4pc since the credit crunch began last summer, even though Euribor lending rates have jumped 120 basis points. The euro has rocketed against the dollar, sterling, yen and yuan.

The full effects of the monetary and currency squeeze will feed through the eurozone over the next year or so. There is a risk that the impact could hit just as the global economy slows sharply.

France's finance minister, Christine Lagarde, praised the apparent policy shift in Berlin. "For the first time my German colleague, who was resolutely determined to back the ECB whatever it does, is telling Mr Trichet, 'Be careful'.

"There is more than one indicator. There is inflation, certainly, but there is also growth. Quite a few of us would like Mr Trichet to keep his eye on both barometers. Until now he has had only inflation on his radar," she said.

Her choice of words is significant. EU ministers have the ultimate power - under Maastricht Article 109 - to shape the eurozone exchange rate, giving them a backdoor means of forcing a change in the ECB's policy. The implicit threat to invoke this clause is a warning to ECB hawks that independence has limits.

The remarks by Paris and Berlin come as US Treasury Secretary Hank Paulson prepares to visit both Mr Trichet and Bundesbank chief Axel Weber today. The Bush administration is reportedly furious with the ECB for undercutting US efforts to stabilise the dollar and halt the oil spike in very dangerous circumstances.

The ECB is playing with fire, forcing the US to pursue a more restrictive monetary policy than it might think safe at a time when the financial system is already in dire trouble. The dispute has echoes of the Transatlantic rift before the stock market crash in October 1987.
Oil jumped $16 a barrel in two days earlier this month on the back of a rising euro after Mr Trichet signalled an ECB rate rise. The market response was a prize exhibit for those who argue that hedge funds have now run amok on the oil markets, using crude futures as a sort of "anti-dollar" currency - with multiple leverage.

It also revealed that ECB tightening in this environment is counter-productive since it pushes inflation even higher. Critics say the bank is chasing its own tail, failing to adapt to the complexities of the modern global economy.

Stephen Lewis, chief strategist at Insinger de Beaufort, said the ECB is right to raise rates, despite the risks. "If they were to back off now after signalling a rise it would cause a catastrophic loss of credibility that would further harm global stability," he said.

"The bank cannot formulate policy on the basis that this might be a short-term price spike. It would destroy consumer confidence and blast economic growth prospects if it lets inflation run ahead."

[bart]

Re: You're not going to believe this: Inflation/deflation debate still alive?

Here's a bit more, and it looks to me the ECB is serious.

"Jean-Claude Trichet, the bank's president, has warned of an "acute risk" of a wage-price spiral unless inflation is wrung out of the system."

They may very well raise and they do seem a bit less profligate than the Fed, but talking about only a 1/4 point raise in the context of wringing inflation out of the Euro area doesn't strike me as being highly comparable data points.

[Jim Nickerson]

Re: You're not going to believe this: Inflation/deflation debate still alive?

http://www.safehaven.com/article-10652.htm

Who's that knocking at my door and shouting "deflation"? Would you guess, Mike Shedlock.

Snips.

We had a crack-up-boom. What else can you call the financial engineering that went with SIVs, Conduits, Toggle Bonds, Covenant Lite loans, Pay Option ARMs, etc., etc? That crack-up-boom is over. And just like every credit boom in history, the backside, once the credit boom ends is deflation. Previous examples include Tulip Mania, the South Sea Bubble, John Law Mississippi scheme, the Great Depression, and the property bust in Japan.
.
.
The odds of a significant bout of inflation now are about the same as they were in 1929. Next to none. History is about to repeat.

Edit: and the article at safehaven.com above Shedlock's is titled "We have Inflation not Deflation." http://www.safehaven.com/article-10653.htm I post that link without having read a word of the article. My attitude about this whole issue is becoming as the student who was asked, "What is the difference between ignorance and apathy"? To which he replied, "I don't know and I don't care."

For myself I am not convinced anyone knows how things will be in months, years, or a decade. For my own money, I have a bit toward inflation and a bit toward deflation. However it turns out between now and whatever is finally the answer, I hope to play the trends which is no easier than playing whatever one sees as the best long-term bet.

[FRED]

Re: You're not going to believe this: Inflation/deflation debate still alive?

http://www.safehaven.com/article-10652.htm

Who's that knocking at my door and shouting "deflation"? Would you guess, Mike Shedlock.

Snips.


Edit: and the article at safehaven.com above Shedlock's is titled "We have Inflation not Deflation." http://www.safehaven.com/article-10653.htm I post that link without having read a word of the article. My attitude about this whole issue is becoming as the student who was asked, "What is the difference between ignorance and apathy"? To which he replied, "I don't know and I don't care."

For myself I am not convinced anyone knows how things will be in months, years, or a decade. For my own money, I have a bit toward inflation and a bit toward deflation. However it turns out between now and whatever is finally the answer, I hope to play the trends which is no easier than playing whatever one sees as the best long-term bet.

EJ writes in:

We told readers August 2001 that inflation was coming as a result of the political response to the collapse of the tech bubble. At the time the Fed was waving its hands around warning about deflation as were 99% of MSM and "contrarian" commentators, thus all the cheap gold, silver, and platinum that could be picked up for what today seem like absurd prices. If you were here at the time and were inclined to act on the call, you bought PMs and are up 300% or more. We did. My 15% position is now up more than 300%.

Likewise the bear market calls in March 2000 and December 2007 helped readers inclined to short the indexes make a few bucks, but in any case helped, as near as we can tell from the hundreds of emails we received, many thousands of readers to avoid the evaporation of wealth of anyone holding on through the NASDAQ correction which, I will remind readers, is still trading 50% below its peak.

The reason our track record is good is that we never, ever play to our audience. We do not answer serious questions about the money system with platitudes like "gold is honest money." We are interested in the functioning of the Political Economy. Sterile economic models tell us little. Charts tell us only where we have been, and are especially useful in showing the relationships between factors, but only as they occurred in the past. They help us ask the right questions.

Forecasting is an art, not a science. Frustration and bewilderment is there to greet anyone who hopes it to be a science.

Sometimes we are wrong, such as when we expected a period of disinflation to follow the collapse of the housing bubble. In the event we as certainly running into the period of credit contraction we expected, but with the Fed determined to keep interest rates above the zero bound by targeting money aggregates (see Zero Bound Diaries: Is Bernanke Volcker's Mirror Image?), it appears that the result of this primary mission is a weak dollar and energy imports led inflation as far as the eye can see.

September 2006 I concluded that Ka-Poom in the post housing bubble period could not be traded (see No Deflation! Disinflation then Lots of Inflation). This turned out to be the case.

Fast forward to June 2008. Now the BIS is warning of deflation:

The magnitude of the problems yet to be faced could be much greater than many now perceive," it said. "It is not impossible that the unwinding of the credit bubble could, after a temporary period of higher inflation, culminate in a deflation that might be hard to manage, all the more so given the high debt levels."

It is tempting to say, well, when the central bankers' central bank starts to warn about about deflation again, it's time to back up the truck to buy more PMs again, because the printing presses are about to go into hyperdrive.

But here is the crux of the issue. No two periods are ever alike. There is no existing model that represents the unusual set of antecedents that we see today. But one thing I can continue to assure readers of, that there are two ways to get poor after an economy goes into a serious post credit bubble downturn: 1) the price of things falls, but the number of monetary units you have in hand to use to buy them falls even more due to loss of income (deflation), and 2) the prices of things rises, but the number of monetary units you have in hand to pay for them does not rise as much (inflation). One is surely poorer in either case, but we are experiencing the second condition. Those who have predicted deflation ought to say, "Ok, you Inflation forecasters won Round One, but we are going to win Round Two!" That would be the honest approach.

We challenge anyone to explain to us how monetary units in existence, never mind any new ones that central banks may add to the system, can possibly appreciate in this environment, we are all ears. The Fed's hope that recession will cure the inflation it has created around the world is a bold wish given the pressures on world currency values due to many years of accommodative interest rates. We have alluded to many periods in the past when recession and inflation occurred simultaneously. Not in the US, but in other places at other times, to nations that had made a similar set of errors as the US has made. The BIS' fear that the credit crunch may snowball into a deflationary price spiral needs to be seen in the context of the central bankers' view of what "deflation" is. Further, if they can explain how monetary units that are decreasing in value relative to things can possibly buy more things, then we will consider how inflation may moderate or even reverse.

[Charles Mackay]

Re: You're not going to believe this: Inflation/deflation debate still alive?

For myself I am not convinced anyone knows how things will be in months, years, or a decade. For my own money, I have a bit toward inflation and a bit toward deflation. However it turns out between now and whatever is finally the answer, I hope to play the trends which is no easier than playing whatever one sees as the best long-term bet.

Gold bullion is not only the BEST asset to own right now, it may be the ONLY asset to own ... The only one that will protect you from both inflation and deflation.

1) In the Great Depression the smart money moved out of industrials and into gold mining stocks. The stock price of gold mining companies soared relentlessly upward during the entire bear market. Homestake Mining rose continuously from $80 in October 1929 to $495 per share in December 1935 - which represents a total return of 519% (excluding cash dividends) during the most devastating part of the bear market. Obviously gold bullion's purchasing power rose tremendously also, regardless of FDR's boo boo.

2) On the other hand, if we go into an extended period of stagflation or even hyperinflation gold will be the best asset to own during that as well.

All hail gold bullion! ;)

[Jay]

Re: You're not going to believe this: Inflation/deflation debate still alive?

EJ writes in:

We told readers August 2001 that inflation was coming as a result of the political response to the collapse of the tech bubble. At the time the Fed was waving its hands around warning about deflation as were 99% of MSM and "contrarian" commentators, thus all the cheap gold, silver, and platinum that could be picked up for what today seem like absurd prices. If you were here at the time and were inclined to act on the call, you bought PMs and are up 300% or more. We did. My 15% position is now up more than 300%.

Likewise the bear market calls in March 2000 and December 2007 helped readers inclined to short the indexes make a few bucks, but in any case helped, as near as we can tell from the hundreds of emails we received, many thousands of readers to avoid the evaporation of wealth of anyone holding on through the NASDAQ correction which, I will remind readers, is still trading 50% below its peak.

The reason our track record is good is that we never, ever play to our audience. We do not answer serious questions about the money system with platitudes like "gold is honest money." We are interested in the functioning of the Political Economy. Sterile economic models tell us little. Charts tell us only where we have been, and are especially useful in showing the relationships between factors, but only as they occurred in the past. They help us ask the right questions.

Forecasting is an art, not a science. Frustration and bewilderment is there to greet anyone who hopes it to be a science.

Sometimes we are wrong, such as when we expected a period of disinflation to follow the collapse of the housing bubble. In the event we as certainly running into the period of credit contraction we expected, but with the Fed determined to keep interest rates above the zero bound by targeting money aggregates (see Zero Bound Diaries: Is Bernanke Volcker's Mirror Image?), it appears that the result of this primary mission is a weak dollar and energy imports led inflation as far as the eye can see.

September 2006 I concluded that Ka-Poom in the post housing bubble period could not be traded (see No Deflation! Disinflation then Lots of Inflation). This turned out to be the case.

Fast forward to June 2008. Now the BIS is warning of deflation:

The magnitude of the problems yet to be faced could be much greater than many now perceive," it said. "It is not impossible that the unwinding of the credit bubble could, after a temporary period of higher inflation, culminate in a deflation that might be hard to manage, all the more so given the high debt levels."

It is tempting to say, well, when the central bankers' central bank starts to warn about about deflation again, it's time to back up the truck to buy more PMs again, because the printing presses are about to go into hyperdrive.

But here is the crux of the issue. No two periods are ever alike. There is no existing model that represents the unusual set of antecedents that we see today. But one thing I can continue to assure readers of, that there are two ways to get poor after an economy goes into a serious post credit bubble downturn: 1) the price of things falls, but the number of monetary units you have in hand to use to buy them falls even more due to loss of income (deflation), and 2) the prices of things rises, but the number of monetary units you have in hand to pay for them does not rise as much (inflation). One is surely poorer in either case, but we are experiencing the second condition. Those who have predicted deflation ought to say, "Ok, you Inflation forecasters won Round One, but we are going to win Round Two!" That would be the honest approach.

We challenge anyone to explain to us how monetary units in existence, never mind any new ones that central banks may add to the system, can possibly appreciate in this environment, we are all ears. The Fed's hope that recession will cure the inflation it has created around the world is a bold wish given the pressures on world currency values due to many years of accommodative interest rates. We have alluded to many periods in the past when recession and inflation occurred simultaneously. Not in the US, but in other places at other times, to nations that had made a similar set of errors as the US has made. The BIS' fear that the credit crunch may snowball into a deflationary price spiral needs to be seen in the context of the central bankers' view of what "deflation" is. Further, if they can explain how monetary units that are decreasing in value relative to things can possibly buy more things, then we will consider how inflation may moderate or even reverse.

EJ, I think I understand the broad itulip perspective for the most part, I have based a lot of financial decisions on what I have learned here and it has been profitable for me in many ways. However, while it is obvious that you and the inflationistas have "won round one" isn't it only a matter of Fed policy whether inflation continues? ASH brought this up in another excellent thread earlier.

I understand the argument that the Fed has telegraphed what it is going to do in advance right down to Bernanke's papers on the depression and his helicopter speech, and they have continued to follow that path right up to the present. But doesn't that make the deflation argument easy? Here it is in my limited understanding: the Fed reverses course, shocks everyone and hits the whammy button; closes the TAF, raises rates and heads for shelter. Are they going to do this, from what I have learned, mostly here, probably not, but they could and have done it in the past. Who is to say they don't have an ultimate plan that none of us have thought of, that involves capitalizing on a fiscal deflationary train wreck to make hard changes the system needs? Yes, I know it would hurt the very hand that feeds them, but really aren't they the one who feeds the hand? They could easily let the big, big players know in advance, who could take defensive actions, and clean up the pieces afterward. Too much tin foil?

[jimmygu3]

Re: You're not going to believe this: Inflation/deflation debate still alive?

We challenge anyone to explain to us how monetary units in existence, never mind any new ones that central banks may add to the system, can possibly appreciate in this environment, we are all ears. [/COLOR]The Fed's hope that recession will cure the inflation it has created around the world is a bold wish given the pressures on world currency values due to many years of accommodative interest rates. We have alluded to many periods in the past when recession and inflation occurred simultaneously. Not in the US, but in other places at other times, to nations that had made a similar set of errors as the US has made. The BIS' fear that the credit crunch may snowball into a deflationary price spiral needs to be seen in the context of the central bankers' view of what "deflation" is. Further, if they can explain how monetary units that are decreasing in value relative to things can possibly buy more things, then we will consider how inflation may moderate or even reverse.
[/INDENT]

Playing Deflationista's Advocate...

Monetary units are expected to appreciate vs. houses due to the credit crunch. Rate hikes by the Fed could cause monetary units to appreciate vs PMs, the prices of which already have inflation expectations built in.

Jimmy

[FRED]

Re: You're not going to believe this: Inflation/deflation debate still alive?

Playing Deflationista's Advocate...

Monetary units are expected to appreciate vs. houses due to the credit crunch. Rate hikes by the Fed could cause monetary units to appreciate vs PMs, the prices of which already have inflation expectations built in.

Jimmy

Obviously if the Fed raises rates, PMs will fall. Are deflationistas seriously expecting the Fed to commit fast political suicide by hiking rates during a credit crunch when it can die by slow, politically more expedient inflationary suicide instead?

That is the essence of Ka-Poom Theory, that governments always prefer slow suicide with the potential for recovery within the term of the current administration over the fast suicide with no chance of recovery.

[Guest]

Re: You're not going to believe this: Inflation/deflation debate still alive?

Aaron Krowne in fine form over at the Mortgage Lender Implode-O-Meter this week, chiming in and reiterating much of the iTulip theme on the inflation / deflation debate (whether he acknowledges it or not, he's "one of ours" now -and getting bleaker, too.):
______________________

To illustrate I'd like to ask my friend Mike "Mish" Shedlock, who asserts that "we are in deflation," what he does when he pulls up to the gas station pump. Does he say "we are in deflation now -- just look how home prices are down about 20% from their mid-2006 peak. Therefore I demand you only charge me 80% of mid-2006 ($2.50/gallon) gas prices. So here is $2.00 for a gallon?" I don't think so. He probably intuitively senses that that wouldn't go over very well.
The basic reason this sort of Austrian "instant money quantity" reading is wrong is that plenty of money has already been created over the past 30 years, so there is really no need to "print" any more right now to get most of the bad effects!
______________________

So here you have deflationary causes producing dramatically inflationary effects. Seems counter-intuitive, but this is really nothing new: it is historically called the "flight to real goods", and it happens in every hyperinflation, ALONG WITH financial market collapse.

I believe what we are seeing here in oil, and to a great extent in most other basic commodities, is the FIRST EVER GLOBAL HYPERINFLATION. This is happening historically now and in such a big way because the dollar is the de facto reserve currency -- and the first-ever fiat global reserve currency -- so the Fed's actions are magnified beyond anything that has ever been seen before. They are also eclipsing the effect of the rest of the G7, which can't seem to decide if they will exercise restraint or provide cover for the Fed. They are basically puppets of the Fed (or have been -- there are signs of rebellion, especially from the ECB. I would say this rebellion is inevitable, and it will spread).

But interest rates in the West, if they do start going up by way of policy, probably will not go up fast enough to match the inflation they have already unleashed. And as long as the interest rates remain NEGATIVE in real terms (irrespective of manipulated CPI statistics), the problem will get worse. Hence the "hyper": continued negative real rates alongside collapsing paper money markets (along with supply and demand fundamentals) will keep the tailwinds on prices for essential commodities. Where else is the money going to go?
______________________

So I hope with the above I have convinced you at least that something new and hyperinflationary in nature is going on with oil prices. If by some miracle prices were to correct back to $100, not only would it likely be temporary, but extreme inflation would probably show up in some other commodity, or even (God forbid) precious metals. The need to preserve these trillions of wealth from ailing areas of the financial economy is not going away any time soon. It is going to get worse. In fact, if the authorities had any brains, they'd encourage investment in precious metals to divert immense pressure from food and energy. No one ever starved from gold skyrocketing in price; though it did end a political regime or two.
______________________

It is now getting so bad that the state and local governments are starting to appeal to the Federal government for help: major city mayors recently went to congress to testify about their infrastructure and financial crises (the two are really the same problem) and beg for help. The latest housing bailout bill proposes billions to allow states to buy up foreclosed properties. And this is likely just the beginning.

But the problem is: the Federal government doesn't have any money. It's already deeply in the red, as we just discussed. They can only provide money if they can borrow it, which is bound to reach its limits soon. Where no limits are obeyed, there will be much more inflation, much faster. Any borrowing the Federal government can do above and beyond the states is really only backed by inflation (the ability to print more money to pay off the debt), but the world is beginning to question why bonds backed by little more than inflation should really be considered 'AAA'. That system didn't work so well in the US mortgage market.
______________________

My big worry at this point is that the US economy, for lack of a more euphonious wording, is headed for complete collapse due to failure of infrastructure as the coup de grace of financial stress. Now we will see how critical that mundane thing, so taken for granted, is to even have an economy in the first place. And of course, you can add lack of manufacturing capacity to our the list of infrastructure problems.

Previously I thought "severe recession", and then "depression" to describe what we face, but neither now seems to do the situation justice. An aspect of the trouble now beginning to figure prominently is the failure of American cities to function as laid out in their current form... because of the new factor of people simply not being able to afford to drive their cars (especially from home to work). Kunstler has been writing about this for years. In return he was considered a carnival side show; a sort of amusing angry little man off in his own little world. But now it looks like he was right.

A. Krowne.