But we’re not…yet.

Classic economic theory says that money supply can be used to stimulate the economy and our central bankers seem to agree. That’s why they’ve pumped more than $1 trillion dollars into the economy, engineered countless bailout bonanzas for zombie institutions, put Detroit on life support, and delivered a bunch of financial Band-Aids to the trauma ward — all in a desperate bid to make Americans feel better about the global financial crisis.

To their way of thinking, the trillions of dollars have been a success. That’s why any meeting of the Group of Eight (G8) nations looks more like a mutual affection society with central bankers anxious to claim credit and backslap each other in congratulations for having avoided the “Great Depression II.”

But by taking the Federal balance sheet to more than $2 trillion from $928 billion 2008, they’ve created a situation that should have resulted in an epic inflationary spike to accompany the 137% increase in liabilities.

Yet that hasn’t quite happened.

Core inflation — which denotes consumer prices without food and energy costs — has actually decreased from 2.5% in 2008 to 1.5% presently. And that has many investors who have heard the siren call of the doom, gloom and boom crowd wondering if they’re worried about nothing.

So what gives?

Well, there are four reasons we haven’t yet seen hyperinflation:

Click here to continue reading Mr. Fitzgerald’s article.

–The end result of the weekend’s talk fest is that oil and food prices will probably head higher and the U.S. dollar will head lower. The big shadow looming over global “growth” will get darker and longer.

–Today, however, don’t be surprised to see a nice little rally in share prices. We have no idea why that would be the case. But that’s what all the papers say. America rallied on Friday. It’s our turn!

–Indecisive is the word we’d use for the market. The Reserve Bank may shed some light on future interest rates when it releases its meeting notes later this week. But it’s going to be like this for the next few months, we reckon. High oil prices and inflation have everyone around the world worried sick about “growth.”

–Growth is progress. It’s the nearest thing economic atheists have to religion. The financial economy requires growth in earnings, growth in GDP, growth in credit, and growth in asset prices to function correctly. Without growth, there is recession.

–Of course the financial economy is NOT functioning correctly because all that earlier credit growth didn’t create real value…it just created higher prices for houses, financial stocks, and exotic financial instruments. But wait! There’s an upside to all this. Real wealth destruction apparently creates…value!

–Now is an excellent time to pick up cheap stocks, we are told. There may be no growth, but at least there’s value.

–Hmm. That may be the case. But we wouldn’t make it for “the market.” Now is not a good time to simply buy “the market.” If you want to find value, you have sort out the winners and losers from this ongoing bear market in credit. Babcock and Brown? A loser. And who will the winners be?

–Well, value is no good without growth. That is why the distinction between the two is pretty useless. It’s a distinction that allows professional economists to be bullish at all times, buying growth in a bull market and value in a bear market.

–But a bear market is not good for stocks, no matter how good the stock is. Still, it pays to focus on good stocks and to remember that a good stock is a combination of tangible value AND growing earnings. To grow earnings, it has to be a good business run by smart people.

–You can break down a good business and good management into numbers and metrics. That is what we do in our two investment newsletters, Diggers and Drillers and the Australian Small Cap Investigator. That’s why this is still a stock picker’s market and will remain so for the next few years. Good luck stock pickers!

–Did you see that the people of Ireland rejected the massive Superstate project being foisted on them by the unelected socialist/fascist/communist bureaucrats in Brussels? Let’s buy that country a Guinness. Or four, since we’re binging.

–The Irish were some of the only people in Europe actually allowed to vote on the European project. That’s because Ireland’s constitution requires that any changes to it be voted upon by the people. Free people are reluctant to give up their rights to the State without a very good reason. That’s how they stay free, by containing the growth of the State and its faceless minions.

–This is exactly why the whole EU project has been concocted, discussed, and ratified at the Parliamentary level in Europe-so the people don’t get a chance to vote and say no. And here we thought America’s political class was out of touch and at odds with the electorate. In Europe, the political leaders treat the people with contempt, like children who will be told what to do whether they like it or not.

–We mention it only to point out that the Europe’s currency is fundamentally as flawed as the U.S. dollar. The dollar is poorly managed. The Euro-a mongrel currency for many different economies with many different needs-will fare no better in the long run.

–About the only thing that could lead to a U.S. dollar rally in the short-term is a euro catastrophe. It’s not the sort of thing you forecast. But it’s the sort of thing to keep in mind.

–Speaking of unsustainable myths, what about the Aussie housing market? It’s been a while since we visited the subject. But the housing Pollyannas are coming out of the woodwork again. And they’ve brought two friends with them this time.

–Immigration and easier credit. This the dynamic duo that will lead Australian house prices as much as 22% higher by 2011 according to a new report from BIS Shrapnel. “House prices are tipped to rise next financial year as Australia’s fastest population growth in two decades outweighs the effect of higher interest rates, an economic forecaster said.”

–The big surge in immigration will drive houses prices up everywhere in the next three years. BIS tips 22% gains on the Gold Coast and Sunshine Coast, 21% in Darwin, 18% in Sydney, 16% in Adelaide and Melbourne, 15% in Canberra, 14% in Hobart, and just 9% in lowly Perth.

–Granted, we haven’t seen the detailed research that supports these conclusions. But doesn’t it depend on what kind of immigrants you get? High-wage skilled immigrants might buy. Lower-skilled immigrants (like your editor) will probably rent because it’s all they can afford to do. Housing is still a financial question, not a demographic trend.

– It’s true that everyone needs a place to live. But not everyone can afford to buy a house-especially when the median house price in all the land is $458,888. Imagine getting off the boat and finding out that’s what it will cost you to get your new life started in the Lucky Country.

–By all conventional historical measures, house prices are already well-ahead of where they should be in Australia. In the 1970s, median Aussie house prices were about three times median household income. If you made around $10,000 a year, you could expect to pay about $30,000 for your first Australian dream.

–According to the Australian Bureau of Statistics, the median household weekly income in Australia is $1,027 per week, or $53,404 per year. The median house price is $650,000 in Sydney, $500,000 in Perth, $515,000 in Darwin, $432,000 in Melbourne, and $365,000 in Hobart.

–That means that at the high end, home buyers will pay as much as ten times their income to get a house in most parts of the country. If you live in Tasmania or South Australia, house prices will be lower, but incomes might be lower too.

–Do you see the problem here? The only way to make up the difference between income and asking price is with debt. The big D. The Devil’s favourite word. That’s what’s driven house prices up so much already…people gearing up to get into the market with the belief that house prices will keep rising. Yet historically-when it’s not a bubble-house prices go up at about the same rate as inflation.

–The demographic argument for higher house prices is also a stupid and misleading one. We heard it for years in the States as a way to justify stupid financial decisions. Everyone needs to eat, too. But if you don’t have a lot of money, you don’t eat in fancy restaurants. You shop at Woolworth’s and cook at home.

–What you put in your body and where you lay your body down to sleep at night are always financial decisions. And that come down to interest rates and how big a monthly mortgage payment you can afford. Demographics don’t change affordability (if anything, you’d expect immigrants to be in lower income brackets and further away from home ownership). Just because there are more people doesn’t mean they can all afford a house or get credit to buy one they can’t afford.

–That’s really the big revelation/claim/fantasy in the BIS report. “As credit conditions recover over the course of 2009, we expect banks will gradually pass on lower borrowing rates to customers,” the report’s author concludes. Yes. Because banks are generous like that, especially when they’re trying to rebuild their profit margins and recover from losses and write offs.

–Will credit conditions recover in 2009? We reckon they will never be as good again in our lifetimes. The bull market in credit was the greatest the world has ever seen. It’s a bear market now, and it’s still pretty early in that bear market. Be ready for a long few months.

Source: A Dubious Housing Forecast