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Happy Times or Hyperinflation Ahead?


Will deflation or hyper-inflation ultimately take hold?


So now we are back to ponder whether the party is back on and Hoofy will make up for lost time with a year-end orgy. Remember, Minyans, that three short months ago our bovine friend had the world all figured out, so why can't we just go back to that happy place?

It's possible that it may happen. If you watched Bernanke's jaw tighten while Rep. Paul grilled him on debasing the dollar through rate cuts and the PPT's interventions in various financial markets, that may prove to some whether such conspiracies are fact or fiction. Fighting the Fed's monetary policy and its active involvement on the buyside of markets is a tough hill to climb. On the other paw, that's only effective as long as your currency is still worth something, and by way of reference, Miller Tabak's Tony Crescenzi (no perma-bear for sure) yesterday referred to the dollar's plunge as "disorderly"; not what Boom Boom wants to hear two days after overheating the printing presses.

In my view, this conundrum is really another way of asking the never ending question: will deflation or hyper-inflation ultimately take hold?

I was discussing this with Prof. Reamer and he remains convinced that as the printing of credit finds fewer and fewer takers, we are bound to collapse into deflation; hyper-inflation stems from a creation of currency rather than credit, and what we have had for the last seven to ten years has been a never ending creation of credit. True dat, but we may well be on the cusp of seeing precisely that change. I think Boom Boom may be starting to realize that we are on the downslope of the credit-demand mountain, and - the student of the Great Depression that he is - that it may be time to dust off the choppers to drop cash all over America.

I may be off-track here, but this past month's plunge in M1 supply (currency and checking account balances) may be an indication that the dislocations we have seen in the credit markets are drying up not only credit but also currency. If that is the case, you can rest assured that Boom Boom will drop Benjamins from helicopters rather than letting the Depression movie play out again.

If you tend to agree with this theory (and it's little more than that) then the next question is how and when will hyper-inflation play itself out. Again, my sense is that unless the dollar totally freefalls, we might have yet another spurt during which the semblance of wealth resulting from invented currency may tow the line and make people think that all is good again. However, that will likely last only until folks start realizing that they are being slow boiled by higher and higher prices (and I don't mean prices measured by the CPI, I mean what you and I actually spend) and that this bout of wealth is yet another illusion.

What does it mean for the stock market? I don't know of course, but writing off the possibility of another blast higher is probably not a slam-dunk play. I remain as convinced as ever that ultimately there will be a historic collapse across the board - and by ultimately I don't mean eventually, rather soon enough for all of us to enjoy it - but perhaps not before the last known bear is left for extinct.

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