Treasury Bubble?

Peak Oil is not a monetary phenomena, so all this ranting we hear about bubbles in treasuries based on oil and food prices is misplaced. The Federal Reserve isn't printing, so that inflationary claim can be tossed out the window.

Swapping is not printing, although it could cause printing down the road. See Fed's Swap-O-Rama Gets Crazier and Fed Is Not King Midas for more about what the Fed is doing and still others want the Fed to do.

In the meantime, writeoffs are continuing at a staggering pace. More writeoffs are coming still. There will bank failures. The Fed is even gearing up for them. Commercial real estate is poised to plunge. There are Record Home Price Drop In Southern California. Walking away will be The Next Mortgage Crisis.

And there is an entire wave of foreclosures coming because Lenders Swamped By Foreclosures Let Homeowners Stay.

Banks are so overwhelmed by the U.S. housing crisis they've started to look the other way when homeowners stop paying their mortgages. Lenders who allow owners to stay in their homes are distorting the record foreclosure rate and delaying the worst of the housing decline, said Mark Zandi, chief economist at Moody's Economy.com, a unit of New York-based Moody's Corp. These borrowers will eventually push the number of delinquencies even higher and send more homes onto an already glutted market.

"Some people stay in their houses until someone comes to kick them out," said Angel Gutierrez, owner of Dallas-based Metro Lending, which buys distressed mortgage debt. "Sometimes no one comes to kick them out".

Think that's market to market?

There is not a thing above that is remotely inflationary. I am sticking with what I said in Now Presenting: Deflation!

It's time to stop pretending. Deflation is here and it is now. Anyone who sees stagflation or inflation out of what's happening now is missing the boat.

People point to rising M3 or MZM. But they fail to note that the biggest rise in M3 is institutional money market funds. Why are those rising? Because businesses are tapping credit lines while they still can and parking it in money markets. Is this inflationary? Hardly. Those who propose it is show a lack of understanding about what is really happening.

What about bank credit? Supposedly bank credit is still rising. At least that's what the chart shows. But marked to market is bank credit really rising? No chance.

Is Peak Oil Causing Inflation?

The answer is clearly no. Peak oil can never cause inflation in and of itself. Inflation is an increase in money supply and credit. Peak oil cannot cause that to happen. Rising oil prices in general, for any reason cannot cause inflation either. However, rising oil prices could be a result of inflation. But given that the U.S. is in deflation right here right now, the recent rise in oil prices can't be attributed to inflation, at least in the U.S.

Rising oil prices can be attributed to rising inflation in China, rising worldwide demand, and peak oil. That is a nasty brew and there is no way for the Fed or the European Central Bank to control it.

Suppose oil production in a large Saudi Arabia oil field halted tomorrow. Oil just ran out unexpectedly and oil surged to $300. Would the correct response be to hike interest rates to combat inflation?

The idea of course is preposterous. Every central bank in the world would be rapidly cutting rates because economic activity would drop off a cliff. Instead of shutting down that oil field overnight, imagine it shuts down over time. Just like is happening. Oil prices rise. Is the response from central bankers supposed to be to keep hiking?

That simple example should show why setting interest rate policy based on the price of oil is absurd. However, central bankers are certainly guilty of spawning bubble blowing policies that have led to the mess we are in.

And as I said in the Fed Uncertainty Principle, "I don't know, you don't know, and the Fed does not know what to do. This is part of the "Fed Uncertainty Principle" and a key reason why the Fed should be abolished."

Perhaps there's a bubble of some sort in bonds, but if so, the price of oil sure doesn't prove it. Only by getting rid of the Fed and checking the resultant answer would one know for sure.

Why Is Gold Rising?

People keep asking me why gold is going up. The answer is that it should be going up. Money (and gold is money), tends to increase in value in deflationary times. It doesn't have to but it tends to. So why, isn't the dollar going up? Because it is not backed by gold. Credit is being repudiated and there's a flight to real money (gold), and other hard assets.

Can there be another leg down in gold? Of course. Deflation is likely to remove leverage everywhere, and that includes hedge funds and other speculators hiding out in commodities and gold. The only unknown is from what level that happens. It could happen now, or it could happen from a higher level. I am open to either possibility.

A Weak Dollar Is Masking Deflation!

Right now what we have is deflation with a weak dollar. That weak dollar, in conjunction with peak oil, has caught nearly everyone off guard to the point they are screaming about oil prices and bond bubbles, while missing the far more important deflationary forces of foreclosures, bankruptcies, and massive writedowns in credit.

The combination of a weak dollar, peak oil, job losses, falling home prices, walk aways, and global wage arbitrage is the checkmate scenario for the Fed. Chairman Bernanke will find it impossible to inflate out of this mess.