i think a good indication of future inflation is the us treasury yield curve. long term rates have risen sharply in the past few weeks as investors have finally gotten a whiff of the inflation to come. despite the fed's efforts to buy t-bonds, the steepness of the curve indicates inflation is on the way. i don't think there is any likelihood of inflation of only 3-5% next year, even using the official government figures that exclude food, energy, and anything else that became more expensive.

This is the conventional argument in a typical business cycle, but this is hardly a typical business cycle. Yes, confidence in the dollar/bond market is shrinking causing long rates to rise, but what happens to all those ARMs that are about to reset? What happens to commercial loans that have to be rolled forward? What happens to new mortgage originations when the old ones are still coming apart and the problem has spilled into prime paper?

Too much money chasing too few goods is the standard definition, but who has any money these days? GM workers? California government employees? Part of the conventional inflation equation is rising wage demands in the face of rising prices. So, where's the bargaining power of labour this time around?

Yes, new money is being "printed" hand over fist, but it isn't going anywhere. It sits on the books of insolvent banks whose directors wait anxiously for the next shoe to drop. Excesses of the kind we've seen over the last 20 years aren't resolved over a few measly quarters. Some of these suckers were leveraged 50 to 1. Many of them had side bets in the CDS market whose counter-parties have since gone poof. Not a recipe for a quick recovery IMO. Hell, you even had the Chinese laughing when Mr G told them their money was safe. What does that tell you?

I take the side of deflation in these discussions because no one else will, but that's just a mental exercise. Frankly I think it's a sterile debate. We are going to have both deflation and inflation to varying degrees over the next decade or more. I reiterate - this is NOT a normal business cycle, this is one of those long-wave things that Kondratiev talked about. This is Minsky's crack-up boom, or to put it in McLuhanese: you push something hard enough, it flips into its opposite.

One thing I've learned over the years is to always, always question my assumptions. Our terms of reference are taken freely from modern economic theory without ever questioning the underlying assumptions. That's what I'm trying to do here - question assumptions, including my own. Not always easy to do, which is why I keep a big slice of humble pie in the freezer, just in case I'm wrong.

But I don't think I'm wrong this time. Maybe early - bears often are - but to see current events in terms of standard economic theory is to me, incorrect. Are we not Austrians, or at least skeptics? Can't we come up with our own theories and put them to the test?

I see prices for hard assets rising as 1) a dollar hedge 2) the result of peak "stuff." Stuff we need is getting hard to find. Accordingly it goes up in price. That isn't inflation, it's just common sense. Prices for other things, like homes and vacations in Mexico, are still falling and IMO have a long way to go. That's lack of purchasing power caused by a general collapse of credit and widespread unemployment, not deflation.

But call it what you like - to me it feels like the 70's when it was called stagflation and I had to go to sea to earn a decent living. (Yarrrr!)

The wild card this time around is China. Now that they've lost their major customer they'll have to turn inwards and start generating their own domestic growth. Can they do it? Probably - they've got a lot of bucks to spend and a big incentive to spend them. Maybe that drives commodity prices for a while, but I don't see it putting a floor under US and European consumers. This is a generational thing that's happening. It changes perceptions, and that changes behaviour. Like the kids in the 60's who rejected their parent's values, I see something similar on the horizon. If you can't afford the lifestyle, then you rationalize how life at a lower level is somehow better - more noble even. This is big potatoes for an economy that relies on the "consumer" for 70 percent of GDP. This is what keeps Helicopter Ben and his Flowerpot Men up nights. Not inflation or deflation, just the masses coming to their senses.

Retrenchment on this scale is healthy over the long run. What doesn't kill you makes you stronger - makes you appreciate what you've got and prompts you to build on more solid foundations. Of course this is the last thing Wall St. and the Big Money Cats want, but screw them. If we can't defeat them in a direct assault, we'll just wear them out by sitting on our wallets forever. We can do that. We ARE doing that. Hell, do we have any choice?

ebear