This from The Daily Reckoning:

Sunday afternoon, we sat down in the large leather chair in front of the fire. Its arms were shiny and worn…much lighter in color than the rest of the brown chair.

Immediately, we felt wiser. Then, a blindingly bright flash of insight seem to come out of nowhere. Suddenly, we saw into the dark heart of the beast itself – and peered into its soul. And then, we watched in horror. In our mind’s eye we saw images of recession… depression… despair… desperation… and finally upheaval…in which the whole system…the world’s dollar-based money system…came crashing down.

Yes, dear reader. We are a proud heir to Dr. Kurt Richebacher. Not of his weighty intellectual career in economics. We are heir to his chair. After he died, his estate sold us his chair. We keep the Dr. Kurt Richebacher chair in our library. Sitting in it this weekend, we thought we saw the whole financial crisis more clearly.

“The only cure for a Bubble is to prevent it from developing.” said Kurt Richebacher .

In other words, you can’t cure a Bubble by cutting interest rates, easing bank lending requirements, running bigger government deficits, sending out ‘rebate’ checks, buying up Wall Street’s stupid mistakes, or bailing out sinking businesses. You can’t cure a bubble by reflating it. You can’t cure a bubble at all. You have to let it pop…and then go about your business. Get it over with quickly; that’s the best you can do.

Think that will happen? Where have you been, dear reader? Out of blackberry range?

No, the feds are at work – with their patches, their rescues, their bamboozles and their swindles.

In our brief moment of clarity, induced by the Richebacher chair, we saw what was coming – the biggest financial bailout of history. It will be like WWII, without Betty Grable…like the New Deal without the wheelchair – and like nothing we’ve ever seen.

Saving America from free-market capitalism will become the Great National Project of the Obama years. Deficits will top $1 trillion…maybe $2 trillion. Brain dead businesses will be kept alive. Whole industries that should be allowed to go broke will be protected. Towns, states, and colleges that should go bust will be propped up. There will also be a huge building boom – in infrastructure. Bridges, trains, highways…

… it may be time to buy cement companies!

The bailouts are just money down the drain. As for the bridges, who knows whether they are worth the money? But this massive program will achieve its real purpose – distracting and diverting Americans from their loss of wealth.

Source: Millions Of Mistakes Need Correcting

Over the past few months, we have heard numerous times in the media that the Federal Reserve and the other central banks have a choice between economic growth and rising prices (wrongly defined as inflation). In fact, most investors have been brainwashed into believing that the policies that stimulate strong economic growth automatically result in higher prices within the economy. For example, in our current situation, it is now widely believed that by slashing rates and adding liquidity to the financial system, the Federal Reserve is opting for strong economic growth in the United States. which in turn is causing the consumer price levels to rise. In other words, most people are being hoodwinked into believing that the prices are rising due to strong growth.

In my view, the above assessment is totally incorrect. After all, any student of economics will be able to tell you that if the money supply was constant, strong growth would not lead to higher prices. On the contrary, strong economic growth (increase in the production of goods and services) would result in price declines as the supply of “things” increased in relation to the amount of money available in the economy. Conversely, a weakening economy (decrease in output) would assert upward pressure on prices as the production of goods and services declined in relation to the amount of money available to purchase those “things”.

In the current monetary system, however, the supply of money is not constant and the central banks of this world are free to create as much inflation (money-supply growth) as they want. There is a catch – the central banks can only do so as long as they can keep inflationary fears in check by constantly reminding the public of the threat of deflation. Turning over to the current situation, it should not come as a surprise that in the past few weeks the media has published various stories comparing the recent downturn in the United States to the Japanese deflationary bust or the Great Depression of 1929. This “deflation” propaganda is crucial to further promote the Federal Reserve’s agenda of creating even more inflation as a “cure” for the ailing economy. Let there be no doubt that the Federal Reserve is now desperately trying to inflate the system via rate-cuts, pumping of liquidity and bailouts. And it is this monetary inflation and weak economic growth which is causing commodity and consumer prices to rise. Unfortunately, for the average American, this is occurring at a time when their economy is weakening, incomes are falling and unemployment is rising. In other words, I would argue that the Federal Reserve’s inflationary efforts are making things a lot worse for the majority of people.

My intention is not to criticize Mr. Bernanke, as I honestly feel that he is simply a cog in the wheel, an insignificant part within the overall system. Rather, I sympathize with him since he is now dealing with the mess which Mr. Greenspan created by leaving the Fed Funds Rate at a ridiculous 1% long after the U.S. recession ended earlier this decade. It is my firm belief that Mr. Greenspan’s ultra-loose monetary policies in the aftermath of the technology bust largely created the ongoing financial and credit crisis. And now, Mr. Bernanke is left with no choice but to continue with the inflationary program or else there would be a global economic depression. Due to Mr. Greenspan’s record-low interest-rates, American home prices skyrocketed between 2001 and 2005. However, they have fallen sharply in the past three years – and show no sign of bottoming out.

As an investment-manager, it is not my role to pass a moral judgment on the actions of central banks and governments. To be fair, given the level of debt imbedded in the West, central banks have no other option but to inflate. The problem though for the U.S. economy stems from the fact that this newly created money seems to be finding a home in commodities rather than financial assets. It is interesting to note that since the Federal Reserve started slashing interest-rates in August last year, energy, metals and food prices have gone to the moon, whereas the U.S. dollar and American stocks have plummeted. Unfortunately for the U.S. establishment, the “cure” of monetary inflation seems to be going horribly wrong as it is translating into even higher consumer and producer prices. I have long maintained that this decade would belong to commodities and the markets are proving me correct.

Over the past few months, the prices of commodities have gone through the roof due to supply and demand imbalances and massive monetary inflation. However, given the turmoil in the markets and loss of confidence, resource stocks have been punished by investors. This development is strange to say the least, and it has paved the way for a massive buying opportunity in the most coveted sector of the future. I find it absurd that the investment-community is dumping quality resource stocks at a time when the underlying commodity prices are super strong. At the end of the day, businesses are valued based on their corporate earnings, and with sky-high commodity prices, I can assure you that elite resource-producing companies are going to announce fantastic results in the months ahead. Today, top-quality diversified mining companies are selling at 12-13 times earnings (bear-market valuations) and I can only guess this is due to the fact that most people expect commodity-prices to crash in the months ahead. However, if my homework is correct and commodity prices continue to soar in the future, we will see a major re-rating in the valuations of resource-producing stocks. Some of you may remember that during the technology mania at the turn of the millennium, technology companies (even dodgy ones) sold for ridiculously high valuations. Well, we can expect to see the same type of madness in relation to commodity stocks in the future.

Regards,

Puru Saxena
for The Daily Reckoning

Editor’s Note: Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription here.

Source: Growth & Inflation Debate

It is beyond comical to watch all the various pundits applaud the Fed’s action as they piece together bailouts and desperately cheap money. Those who cheer them are nothing more than apologists for a crooked and predatory monetary system. Maybe it would be wise to look deeply and understand that this “ultimate private franchise” is the root cause of the problems they are getting credit for patching up??

The elitist international bankers who own the Fed are inflators by charter. They are licensed by Congress to supply what we use as money. Here’s their historic report card:

One of the Fed’s mandates is “stable prices”. A shrinking and shrinking dollar won’t get that job done. That looks like an F from this angle, even if you grade on the curve.

Pretty clever of them for sure. How exactly did they accomplish such an extraordinary feat?

Yep, they issued unfathomable debt. This pleases the politicians. Well connected cronies are thrilled. Individual recipients of the funny money are certainly pleased. Too bad our future generations have to pay these debts. Or do they?

Both of these above charts are from “Your US Dollar Ain’t Worth a plug Nickel”. I’m not quite old enough to know what a ‘plug nickel’ is but the illustration gives a strong hint.

The more debt (money) these central planners issue the more they cream off the top. Debt is to the non-Federal non-Reserve as chicken is to KFC. One franchise is just an order of magnitude, more elite than the other.

Would you like to see an example of what happens when inflation fails?

This is an example of a decade of falling real estate and stock prices from Japanese history. It is a clear cut demonstration of the ravages of deflation. Central bankers have nightmares about such scenarios. This is what happens when fiat money freezes up.

Japanese banks didn’t stop making money available. They were practically giving it away with itty bitty interest rates (under one percent). They tried and tried to “stimulate” their economy. Nothing worked. The populace refused to borrow and spend.