Demand-pull inflation is described as too much money chasing too few goods.

The U.S. government is heavily in debt to the tune of over $11 trillion. How will we pay this back? We will certainly not default on our debt anytime soon. It’s possible that the government could simply inflate its way out of this mess, so essentially the biggest debt ever amassed could be paid back with almost worthless dollars.

The Chinese see the writing on the wall and are getting worried. For years we’ve been getting all this cheap stuff and we’ve given them paper IOUs. They will be left holding a mountain of devalued dollars and Americans will keep all the inexpensive goods we have accumulated over the years.

We learned from the Great Depression that deflation is to be avoided by all means necessary. They call Ben Bernanke “Helicopter Ben” because he once referred to a statement made by Milton Friedman about using a “helicopter drop” of money into the economy to fight deflation. We have recently seen some indications of deflation during this recession, but it’s quickly being eliminated by just speeding up the money printing press. In this case, deflation ultimately leads to inflation.

The Fed cut interest rates to almost nothing in an attempt to head off the deflationary effects of falling house prices and weakening consumer demand. This “reflation” shows us that the Fed is no longer focused on fighting inflation; they are now completely focused on avoiding a depression.

Why is inflation bad? Well, inflation hurts people who have saved up a nest egg and those who live on a fixed-income. The same dollars buy less goods and services. Also, wages never go up as fast as inflation, so working people can experience an increase in their cost of living, without the pay raise to go along with it.

The average American household is heavily in debt, so inflation will allow them to repay their debt in devalued dollars. I once heard a story of a woman in post war Europe that paid off her entire mortgage for the same amount of money that was needed to purchase a book of matches. Knowing this, today’s 30-year fixed rate mortgages at 5.10% look really good…

It’s important that you shield yourself from inflation to protect your wealth and buying power. I think the worst case scenario would be inflation rates similar to the 1970’s as we emerge from this recession.

Ultimately, you can protect yourself from inflation by investing in the right hard assets like gold, silver, copper, oil and even real estate.

Another great way to protect yourself from inflation is to purchase Treasury Inflation-Protected Securities (TIPS). They eliminate inflation risk – while providing a real rate of return guaranteed by the United States government.

The Treasury uses the Consumer Price Index (CPI) as a guide to adjust the principal for inflation on a semiannual basis. A fixed interest rate is paid semiannually on the adjusted principal. In that way, both interest payments and the principal are adjusted for inflation.

TIPS can be purchased directly from the government through its TreasuryDirect program and on the secondary market through banks and brokers.

My favorite way to invest in TIPS is to buy the iShares Barclays TIPS Bond-Exchange Traded Fund. It trades under the symbol TIP. This ETF has low fees, it is very liquid, and holds a diversified portfolio of TIPS of varying maturity dates.

Bottom line: Protect yourself from inflation by having some of your portfolio in TIPS, especially when it’s clear that the recession is behind us.

Source: Inflation is Coming – Protect Yourself with Treasury Inflation-Protected Securities (TIPS)

And with inflation soaring, we can’t expect the Bank of England to cut interest rates this week to try to alleviate any of the pain.

To add insult to injury, the pound, our national virility symbol, has plunged against the euro, so we can’t even afford to go away from it all on holiday on the Continent. And we came last in Eurovision… again. We seem to be becoming the sick men of Europe.

If you can’t beat them, they say, join them. So has the time finally come to dump the poor old pound and plump for the euro?

Why Europe could be in as much trouble as the UK

With the euro now among the world’s strongest currencies, you might assume that the eurozone was in a much better state than Britain. But take a closer look and you soon see that plenty of problems have been cropping up on the other side of the Channel, as well as across the Irish sea.

Take housing. Last week’s Nationwide house prices survey showed that prices were down 4.4% year-on-year in May, the biggest fall since the early 1990s. That’s pretty grim.

But in Spain house prices have already fallen 15% across the board since September, according to the developers’ association (APCE). And in Ireland, house prices were down nearly 10% year-on-year up to the end of March.

Of course, the UK property market is set to get a lot worse. But the same could be said for Spain and Ireland.

Then there’s consumer confidence. In Britain this has crumpled, according to the latest GfK indicator, to its lowest point since Margaret Thatcher was ousted from office. Again, pretty grim. But the eurozone isn’t immune either – French consumer confidence has now fallen to its lowest level in 20 years.

And as for inflation, despite the European Central Bank’s (ECB) reputation as a hard-nosed inflation fighter, Europe’s having trouble with rising prices too. Last Friday’s figure turned out worse than expected, coming in with an annual rate of 3.6%, adding to what ECB president Jean-Claude Trichet has called policy makers’ “biggest challenge”. Despite the strong currency, that’s 0.6% higher than in the UK. Indeed, the pressure’s now building on the ECB for the next move in interest rates to be up.

And the broader picture for the euro isn’t looking a lot brighter than for the pound, either. Because long-term private investors are pulling their cash out of the eurozone at the fastest rate since the creation of the single currency, says a report by BNP Paribas.

Foreign direct investment in plant and factories has swung down over the past year to a negative €149bn (£117bn), including a drop to minus €19bn in March alone as the surging euro drove up relative labour costs in southern Europe. Add in a $280bn withdrawal of private funds from eurozone equities and bonds, and total outflows have exceeded €400bn over the last twelve months.

The euro is now suffering from the “reserve currency curse”, says Ambrose Evans-Pritchard in The Telegraph, as central banks in Asia, Russia, and the Middle East use it as an alternative to the dollar. “While Asian funding has helped ease the credit crisis in Europe, it has also pushed the exchange rate to damaging levels. The eurozone has gained financial flows, but has lost industrial and investment flows.”

BNP’s currency strategist Hans Redeke sees mounting signs of stress. “There are lots of ugly surprises in store as deleveraging finally hits Europe. Investors are going to stop treating the eurozone as if it were just Germany. We will discover in this downturn whether the eurozone is really an ‘optimal currency area’. This is the test”.

So, on reflection, maybe this isn’t the time for the Treasury’s great and good to contemplate dumping the pound. And if you’re still unconvinced, here’s what the FT’s Martin Wolf has to say. He’s such a staunch opponent of such a move, he’s even just criticised his europhile peers in print: “the Lex column argued last week that the UK was close to meeting the economic tests for joining. Lex is wrong.

Three reasons why our currency should be left alone

We’ve not been hurt historically by being out of the euro, says Mr Wolf. Between the first quarter of 1999 and the first quarter of 2008, Britain’s economy expanded by 28% compared with 21% in the eurozone as a whole and 16% in Germany. Nor has London’s position as a financial centre been hurt.

In fact, had the UK been a recent eurozone member, our present situation could be even worse. Our credit bubble would have inflated more, because euro interest rates have been lower. On top of that, now that the domestic spending boom is over, there’d have been no offsetting benefit from the recently plummeting pound.

Inflation may well now rise faster in the UK than in the eurozone, but at least we have some hope of controlling this. The Bank of England can set interest rates to suit Britain alone, rather than relying on the ECB, which is arguably far more concerned with how suitable interest rates are for Germany. If the BoE sticks firmly to its 2% inflation target, Britain will almost certainly veer into recession, but then so will the eurozone countries.

So forget the euro – our currency should just be left alone, to find its own level. Which of course, looks like it could well be considerably lower than it is now.

Source: Should Britain Dump the Pound for the Euro?

Good day… And a Wonderful Wednesday to you! We received more rain yesterday, and the spotting of a twister less than five miles from our office! I’m beginning to feel as though we should be gathering up the animals in twos. The old saying, “right as rain” is losing favor on the list of things I say!

Yesterday, I left you with the thought that the London traders had been buying dollars since they arrived back from their three-day Holiday weekend. The U.S. traders did the same… And I believe profit taking was the order of the day. Unfortunately though, it left the euro (EUR) down one-cent on the day.

The data for the U.S. yesterday wasn’t anything that would lead one to buy dollars, but that’s the game that people play now, every night and every day now… So, let’s go to the tape on the data and be finished with that!

First off, the Case/Shiller Home Prices data showed more rot on the housing vine, as their 20-city home price index fell 14.4%y/y in March – a new record low in data back to 2001. Las Vegas led the way (-25.9%), with Miami a close second (-24.6%).

You can’t tell me the housing meltdown has “bottomed” – not with data like this! And… You can’t tell me that consumers are not being just beaten around the head and shoulders daily with gas prices, food prices, falling house prices, and debt up to their eyeballs!

Speaking of consumer debt… I’ll bet a dollar to a Krispy Kreme that the next big shoe to drop will be the “maxed out” credit cards that consumers have been busy running up, since their “ATM” (house) has closed. I’m not wishing this to come true, folks… I’m simply talking about what I see happening. Sure hope I’m wrong about that one, because credit card debt is the absolute worst thing to have hanging over your head!

OK… Down from the soapbox, and back to the data… The U.S. Conference Board’s consumer confidence fell more than expected in May from 62.8 to 57.2. This is a new low for the data since October 1992, and a depth surpassed only during and just after the depths of recessions since 1970. Need more data that spells “recession”?

Speaking of a recession… A reader sent me a note yesterday saying he was surprised that I didn’t mention that George Soros and Warren Buffett were both “Pfennig readers”, since both were quoted in Europe Saturday as saying that the United States is in a recession, and both said it will be long and deep.

Alrighty then! Hey! My friends down under sent me a note that said they fully expect the Reserve Bank of Australia (RBA) to increase interest rates 50 BPS before year-end. That’s two 25’s… With the first coming in August. Basically, I agree totally, and think these rate hikes will grease the tracks to parity for the Aussie dollar (AUD).

The news didn’t help the Aussie dollar yesterday though, as it looks as though the selling of the Big Dog (euro) affected all the little dogs, even down under!

I’m going to step up on the soapbox again here folks… So if you don’t want to subject yourself to more “Chuck’s views” then skip ahead. OK… If you’re reading this, then that means you’re ready… So, here goes… I was reading stories on the Internet last night and seeing how bloggers and writers are ripping the oil companies. Hmmmm… I guess the “rippers” don’t realize that the guys that head the oil companies don’t own them! The oil companies are owned by pension funds – you, me, and the guy down the street that cuts his grass with his shirt off! We even had some dolt representative from California mention “nationalization” for the oil companies. Of course, she called it “socialism”… Doltness showing there, folks… I shake my head in disbelief.

OK, I’m back now… I have more to say on the subject, but I had better stop there!

In the overnight markets of Asia and London, we haven’t really seen much movement to follow on yesterday’s selling, which is why I believe it was profit taking. Most of the “Big Boys” were out on Friday and Monday… So when they came back and saw the levels, they said, “By Joe, let’s take a profit or two”!

The only currency to see more slippage was the Japanese yen (JPY), with a little slippage from Swiss francs (CHF), as stocks were back en vogue yesterday, and thus the carry trades were back at work.

And the yen’s losses weren’t just against the dollar. Yen is losing lots of ground to the euro again. The losses to the euro had stopped for a while, but they are back!

So… The bad earnings reports of the past 10 days are swept under the rug, eh? Let’s go buy stocks again, the coast is clear! UGH!

Gold saw an end to its rally yesterday too, with a $14 sell off… UGH! The gold sell off also coincided with a big drop in oil price the past few days. Of course, the oil price sell off is the only “welcome” price drop! Oil has dropped from $135 last week to $127 this week… I guess maybe someone in the oil biz got the memo that U.S. drivers are putting the brakes on and not driving so much. Who can? Not with gas prices around $4!

OK, I know that those that own Prius cars can, but you are a very low minority of drivers…

In Germany this morning, we’ve seen some data that should keep rates right where they are if not eventually push them higher. I’m talking about inflation data. Five of the six German regions have reported higher inflation this morning – which points to an increase of 0.06% month-on-month. The consensus was for an increase of 0.04%, so this upside surprise reverses the sharp fall we saw in April. I knew that the April number was questionable.

Norway’s Norges Bank is expected to leave rates unchanged this morning… However, with oil prices being what they are, I expect the Norges Bank to revisit the rate hike table this summer… And that thought should underpin the krone (NOK).

Fed Head Fisher, one of the two dissenting votes of the last rate cut, will speak today. He will speak on “inflation and debt”. This ought to be interesting folks.

Today, we’ll see the color of the U.S. April durable goods, which is not expected to be a “warm and fuzzy for the economy” data print. The forecast is for a decline of -1.5%… But, hear me now and listen to me later… If the print is really this bad, the media will sweep it under the rug, or spin it to sound like good times at Ridgemont High!

So… There you have it! The currencies are drifting about, and are waiting for new signs to give them direction. With that, we’ll head to the Big Finish.

Ben Bernanke, too, says the crisis is easing.

But he went on to say that the situation is still “far from normal.”

What is far from normal, we wonder? The Dow went down 44 points yesterday, leaving stock prices are about where they’ve been for the last 10 years…nothing abnormal about that.

Consumers are still spending money, too. And since they don’t really have any money to spend, they’re still borrowing. A report in yesterday’s news tells us that one in ten baby boomers has to borrow money just to pay everyday expenses.

But here’s something unusual: house prices went down in 2/3rds of America’s cities, according to Bloomberg. In Cleveland, half of all subprime mortgages end in foreclosure.

Houses are America’s number one asset…and the cornerstone of most families’ financial plans. When they go down…so does the consumer economy. At least, that’s our working hypothesis. So far, houses are down about 13%. The economy is down too – but not dramatically. The latest GDP growth figure came in at 0.6%. With the population growing at 1%, that means the average person is getting poorer. So our hypothesis is working…marginally.

Nothing very exciting happened in the markets yesterday, so we will use today to spin out a broader version of contemporary economic history.

Let’s begin with another working hypothesis – give a man a license to counterfeit currency and he will stay up all night printing new bills. In effect, when the Nixon Administration cut the final link between gold and the dollar, in 1971, the feds could print all the counterfeit money they wanted. Normally, you’d expect the dollar to become worthless.

That is exactly what we expected in the ‘70s. But then a few things happened that saved the dollar…and seemed to prove that our working hypothesis didn’t work anymore. Paul Volcker was brought in to protect the dollar. This he did – by driving up interest rates and bringing on the worst recession since the ‘30s. But then, other things took over…the Reagan/Thatcher Revolutions…

deregulation of industries…the rejection of central planning…the collapse of the Soviet Union…the Chinese renaissance…Wal-Mart…the internet…just-in-time inventory systems…and globalisation. All of these things tended to increase productivity and lower prices. The biggest thing was probably in the labour market, where hundreds of millions of new workers came into the modern economy (who would slave away all day for less than a tenth the typical wage in America) and reduced the cost of labour and finished product.

We wondered how much ‘just-in-time’ inventory systems saved consumers. In the latest Grants Interest Rate Observer we find an estimate from Fred Smith, founder of Federal Express:

“In 1980, logistics costs—including the carrying costs of inventory, plus warehousing and transportation costs – were about 17% of GDP. Last year, they were about 10%.”

“Fast cycle logistics,” he says, reduced costs by nearly a trillion dollars a year.

But wait, there’s more….after Volcker cast out the devil of inflation, interest rates could come down. Thus, began a quarter century of falling interest rates and increasingly accessible credit. This eventually produced the absurd and pernicious consequences we describe here in the Daily Reckoning. Just as teenaged kissing leads to petting…which leads to…well, you know how it works, dear reader…success leads to complacency which leads to excess. But the long bull market in bonds (bonds go up when interest rates go down) also vastly increased the supply of capital available for new industries…and caused an explosion in output capacity.

Higher output at lower cost = deflation.

And let’s not forget oil. The basic ingredient in modern economies, petroleum, fell in real terms from the mid-‘70s almost all the way to the war on Iraq.

Let us look, briefly at the oil market. When the US invaded Iraq, we were told that $10 oil was right around the corner. Then, as the war went from triumph to tribulation…the oil price rose. Still, the war’s backers believed they had done good. Higher oil prices couldn’t last, they said. The National Review said oil was a “bubble” in ’04, when it was at $50 a barrel. Then, Steve Forbes said it was a “bubble” at $70 a barrel in ’05. Now…a Goldman expert says it will go to $200 a barrel.

Success leads to excess. Sooner or later oil really will be in a bubble…and sooner or later the bubble will pop. But when? At what price? China is doubling its use of the slick liquid every seven years. In the US, there are 480 cars per 1,000 people. In China, there are only 10. And China could be the world’s largest automaker in just a matter of months. Our advice to Americans: fill up your tanks.

In the meantime, we return to our short version of US contemporary economic history:

With prices stable or actually falling, over the last 20 years, central bankers felt they could ‘stimulate’ the economy whenever it needed a little more pep. The most memorable example, of course, followed the micro-slump of 2001-2002, when the Greenspan Fed dropped rates down to 1% and held them there for over a year. But the printing presses ran hot for many, many years. Over practically the entire period, from the late ‘80s to ’08, the US money supply increased at an average annual rate of about 8% – or about twice as fast as GDP growth.

And now, we are in a period which many take for normal. Our financial Vesuvius has rumbled several times in the last quarter century – the crash of ’87, recession of ’93, the Asian crisis and collapse of Long-Term Capital Management in ’97 & ’98, dot.com crash, and bear market of ’00-’02, recession of ’01-’02, and finally the credit crunch of ’07-’08.

Once again, the ground is shaking beneath our feet. And once again, people are wondering if they should head for shelter. ‘Don’t worry about it,’ say the pundits. ‘It will pass…just as it always does. This is just normal…”

If our hypothesis still works…inflation will blow its top soon. More below…

*** Gold retreated $15 yesterday (more comment on gold below in David Galland’s essay). Oil bounced back to $125.

Yesterday, we mentioned that clothing prices were on the rise. Today, the Wall Street Journal says shoes are taking a hike upwards.

Here in London, inflation is at its highest level in six years. In China, 8% consumer price inflation is spooking the financial authorities. And import prices in the US jumped 1.8% in April.

Yesterday, the Dow fell more than 200 points. Oil, up $1.69, hit a new record. The dollar rose to $1.53 per euro. And gold lost ground…dropping down to $871.Up, down…up, down…what’s going on? Is the economy recovering? Is the stock market giving us the “all clear?” Is the smart money buying the United States of America again?

No. No. And no. At least, not in our humble, timid, looking-over-our-shoulder and keeping-our-fingers-crossed opinion.

Yes, dear reader, here at The Daily Reckoning headquarters we are sometimes right…sometimes wrong…and always in doubt. What are we in doubt about today? Practically everything. Still, that doesn’t stop us from having opinions.

But let’s begin by looking at Consumeris Americanus, a species that has been having its share of trouble lately. Its habitat is threatened by falling house prices…its food supply has become more expensive. What’s the outlook?

First, this report from Bloomberg :

“U.S. consumer borrowing jumped more than double the amount economists forecast in March, indicating a slowing economy is forcing Americans to accumulate credit-card and other forms of debt.

“Consumer credit increased by $15.3 billion for the month to $2.56 trillion, the biggest monthly rise since November, the Federal Reserve said today in Washington. In February, credit rose by $6.5 billion, previously reported as an increase of $5.2 billion. The Fed’s report doesn’t cover borrowing secured by real estate, such as home-equity loans.

“Consumers are turning to credit cards after banks tightened standards for home-equity loans and other borrowing. The March figures brought U.S. consumer borrowing in the first quarter to $34 billion, the most since the first three months of 2001, when the economy entered its last official recession.

“‘Consumers are strapped as incomes are not keeping up with inflation and this is leading them to rely increasingly on credit to see them through the worst housing downturn since the Great Depression,’ said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York. ‘The days of extracting cash from one’s home to spend on goods and services are long gone.’”

But wait? The feds clearly want to protect this endangered species. These dinosaurs vote! So, they’re sending out ‘rebate’ checks…they’re cutting rates…they’re spoon feeding the banks so they’ll be able to help the consumer out with more credit on easier terms.

Richard Benson comments:

“For the average American, this rebate check represents only one car, credit card, or partial mortgage payment. When you consider it cost well over $60 now to fill up the gas tank for a mid-sized car, and a lot more to go out to eat, it won’t go very far.

“On the household front, millions of homeowners haven’t even finished paying their heating bills from last winter, and over six million Americans asked for energy assistance funds so their power wouldn’t be shut off. (In California alone, 1.7 million households are behind on their utility payments.)

“Signs of the stretched consumer include the following stunning facts:

- Home equity loans have a seven percent delinquency;
- Subprime mortgages, past due over 60 days, are pushing 14 percent;
- Over one million homes are in foreclosure and three million more are empty, and up for sale;
- Ten million homes have mortgage balances greater than their value. (No wonder some homeowners are walking away from them);
- In the auto market, 25 percent of all car loans are higher than the car is worth. (The average balance these cars are underwater for is $4,300!)

“Jobs are also falling off a cliff. If it hadn’t been for the Birth Death computer model at the BLS creating service jobs out of thin air, the payroll data would have shown over 280,000 people actually lost their jobs in April. Currently, 2.7 million workers have exhausted their unemployment benefits, and with no job prospects or income, hello collector!”

Meanwhile, the rising price of food has forced a record 28 million Americans onto food stamps. Trouble is, says the bleeding heart press, the giveaways don’t go as far as they used to. Many are “still hungry,” according to a CNN report.

It’s true that we haven’t lived in the United States for more than 10 years. But we used to live right in the heart of the Baltimore ghetto. There, almost everyone got food stamps and other taxpayer-financed freebies. What we recall is that people tended to be overfed…not hungry.

But, back to our doubts and opinions…

Consumeris Americanus isn’t looking his best. But so what? The newspapers tell us that the ‘worst is behind us.’ The credit crunch is over, says Buffett. The housing crisis is over, says the Wall Street Journal . And just look at the stock market…

The stock market is said to look ahead. It is thought to see through the headlines…through the noise and opinions…and through the theories…to tell us what is really going on.

Look, say the bulls, the stock market is doing well; there’s nothing to worry about. The chartists say the next move is up. The Dow Theory folks say we’re still in a bull market. The dreamers are hoping for Dow 15,000.

Of course, they’re right about one thing; there’s nothing to worry about. We’re just talking about money. But anyone who thinks the stock market really predicts future money trends hasn’t been paying close attention. In early January 1990, the key Japanese stock index was over 39,000. It had risen like a rocket for the preceding five years. Surely, it saw more growth and prosperity ahead, right?

But that very same month, Japan, Inc. ran into a serious problem. The stock market crashed…and the economy went into a long slump – from which it still hasn’t recovered.

In the United States 10 years later, again the stock market had registered steady, impressive gains over the preceding five years. The NASDAQ was going almost straight up. Surely, stock prices signaled more growth and prosperity ahead, right?

Nope. The NASDAQ crashed…the Dow sank…and in real terms, after a decade, even in the Dow stockholders are still down 20% to 30%.

No, dear readers, the stock market is often blind, deaf and dumb. It can’t see ahead. It can’t hear the warning whispers. And it can’t put 2 and 2 together.

The Royal Institute of Chartered Surveyors (RICS) reports that the number of surveyors reporting lower valuations exceeded those reporting gains by 78.5 percentage points in March. This was up from a 65.7 percentage point gap in February.

Of course, we don’t know by how much prices are falling. But this is yet more evidence of housing market weakness. Pain in store for homeowners, then. But let’s not get too maudlin here.

Yes, some people may soon find themselves with negative equity. But for most, if they’ve borrowed sensibly, can manage their repayments and stay living in their house for a few years, they should find this is a temporary phenomenon.

But what of the wider economy? Does this news herald the Great Housing Crash that will plunge us into recession? It’s easy to see why people think that — and why they’re worried. The RICS survey began in 1978, and its findings last month were the worst since it started. Small wonder, then, that this morning’s headlines proclaimed the biggest housing slump for 30 years.

But the news can be viewed in a positive light. Or, to be more accurate, in a lesser-of-two-evils light (it’s still evil… no happy ending here, I’m afraid).

British houses are really expensive. So the question we need to ask is, do we want them to stay that expensive (and unaffordable), or do we want the market to do its job and bring prices down?

Of course, if you’re selling a house you pick the first option; if you’re buying – the second. But let’s take a step back and look beyond mere self-interest. Everyone’s worried about a housing crash, so let’s examine option number two first. What might happen?

Well, house prices fall. People whose wealth is tied up in their house are poorer… they feel poorer… and they spend less. Businesses make less money… they invest less… the economy slows down. Maybe even shrinks a little. Not a rosy outcome.

So what if (as many would love) we managed, somehow, to keep house prices where they are. Forget for a second that any effort to do so would be, in all likelihood, futile (the cat’s out of the bag on this one — buyers know sellers are scared, and prices only go one way in a buyers’ market).

To keep prices high would require diverting resources from elsewhere in the economy. It would require more new buyers to borrow up to the hilt. In other words, they’d have to hand over larger shares of their future incomes to existing homeowners, imposing a significant constraint on their future spending.

So, in the coming years, they’ll spend less than they otherwise would have had their house been cheaper when they bought it. And businesses will make less money… they’ll invest less… sound familiar?

The housing market needs to correct. Trying to cheat the system will impact our long-term growth negatively.

So neither scenario is rosy. I’d love to wrap up with something that is, but the best I can do is to tell you inflation hasn’t gone up. In February, Consumer Price Index (CPI) inflation was 2.5%. It was 2.5% again in March.

That’s kind of good news… isn’t it? I would go out and celebrate, but have you seen how much a pint costs these days?

A bunch of bankers… and Gordon Brown

The chief executives of Britain’s biggest banks are meeting Gordon Brown today to drink tea, sample the delights of the Downing Street kitchen… oh, and see if they can’t do something about this here credit crisis.

The King of Barclays, the Earl of HBOS, Lord Royal Bank of Scotland and Mr HSBC-man will all take turns bending the prime minister’s ear.

“They have a lot in common,” says Fleet Street Letter editor Brian Durrant. “Both the banks and the PM overplayed their hands in the good times. The banks now have no confidence in each other and the people have lost confidence in Mr Brown.”

Brian tells me that in a speech in east London yesterday, the prime minister said the economy remains his sole focus.

“No wonder people are worried,” he quips.

Tesco profits jump 12%

First quarter earnings season rumbles on. Tesco’s results have caused a storm in a teacup. Tesco decided not to separately publish the results of its new US subsidiary Fresh & Easy. Analysts kicked off about it, taking it as clear evidence that Fresh & Easy was struggling.

“This overlooked the fact that Fresh & Easy accounts for a marginal amount of Tesco’s net income,” says Theo Casey, our master of the level-headed analysis.

The supermarket’s pre-tax profits rose 12%. Happily the market has ignored the analysts’ wailing — at the time of writing Tesco shares are up 22p.

It’s April Bio-fools day

“It’s madness, utter, utter madness!”

Today is not a great day for Manchester’s most vocal biofuels opponent. Commodities maestro Garry White has long argued that they are a con, but it seems only the Germans are listening.

Germany has decided to ignore an EU target that would require 5% of all fuel to come from biofuels by 2010. Sadly, Britain hasn’t. The Renewable Transport Fuel Obligation becomes law today. It requires 2.5% of fuels to come from biofuels as of today — rising to 5% by 2010.

“And guess where we’re getting it from,” says Garry. “Importing it from America. In ships. I bet they don’t run on biofuel!”

Stupid though this policy may be, it’s thrown up an intriguing investment opportunity, and Garry’s going to tell you all about it.

“Let’s get ready to rumble!”

In the blue corner we have the undisputed heavyweight champion, the United States of America. Big, powerful… it has the experience… but maybe it’s a bit too long in the tooth, maybe it’s taken a few to many to the jaw in its time….

In the red corner we have the challenger, China. Lean, hungry… and with quick feet. But China’s moved up a division. Does it have enough to get the better of its opponent?

There’s a lot riding on this bout. The purse is one quarter of all US oil imports by 2015. The venue, the Gulf of Guinea.

“Let’s get ready to rumble!”, booms an excited Manraaj Singh.

China and America are squaring up to each other in the battle for Africa’s oil reserves. Who will win?

So far China’s looked impressive, but America’s just landed a big right hander — it’s sent in the troops. Manraaj has the latest from ringside, including why this new “Cold War” will actually be a good thing for Africa (and why investors would be mad to miss it).

Until tomorrow,

Ben Traynor