First off an announcement: I am taking a Xmas break: Dec 24 to Dec 28. The next entry will be Dec 29.

I was going to start on the technical picture but a couple of e-mail questions need to be addressed:

• One asked why a little inflation was not a good thing?
• Another asked if I thought a Weimar Republic type inflation (wheelbarrows of money) was what I was envisaging when I use the words ‘inflation/hyperinflation’.

In answering Q1, we need to identify the roots of inflation: the creation of a money supply in excess of productivity. Given the amount created and the FED’s stated intent to create as much as necessary to ‘defeat’ the recession, speaking of ‘a little’ inflation is out of the question. I expect to see inflation rates at around 15%.

A book that paints a vivid picture the US faced such a situation is “The Great Inflation and Its Aftermath” by R Samuelson. You’ll see the negative consequences of inflation in the book.

Q2: As a best guess, at this point, I’d say probably not. I expect to see action taken long before that happens. But we don’t need to see that type of inflation to see a second sub-prime type crisis.

My blogs, “The Sub-Prime Second Wave? I - III” have outlined the probability of a second coming without an increase in interest rates, and this will most probably come given the expansion of the money supply. That being the case, if inflation does rear its ugly head, we’ll see an even greater credit crisis.

Refer this blog post to a friend or colleague…