Bill Bonner (The Daily Reckoning, UK):

Are we in a depression yet? The number of Americans living on food stamps has risen to 37 million. The ‘30s had soup lines. The ‘00s have food stamps.

And what else was big in the ‘30s? Escapist movies. Here’s a headline for you:

“Box office takings set to smash records,” says the Financial Times. What kind of movies? End of the world catastrophes… vampires… strange non-humans doing strange things.

For example, there are ads for Avatar all over Europe. The film seems to concern Spock-like creatures who use bows and arrows. Pure escapism, in other words.

Stocks went down a bit in America yesterday. The commentariat blamed it on higher producer prices, thought to be harbingers of consumer price inflation.

Of course, consumer price inflation is what everyone is counting on.

The debts of the past need to be reckoned with. Borrowers are doing the best they can. They pay when they’ve got the money. They default when they don’t. Since ’07, mortgage debt is down about 2% –to about $10 trillion. Most of that decline comes as a result of defaults and repossessions.

Let’s see, 2% over two years ain’t very much. At that rate, it will take half a century to bring mortgage debt down to the comfortable levels of the ‘80s.

What’s more, it will be hard to do at all. Incomes are stagnant… or actually falling. As people cut back on their spending in order to pay down debt, it reduces income to employers, as a consequence of which the economy is weaker… with fewer jobs and less income to the folks who are trying to pay off debt.

What a drag! People ran up huge debts believing that they would never actually have to pay them. They figured they would refinance, and pocket the built-up ‘equity’.

But, according to a report in this week’s press, though mortgage rates are at a multi-generational low, finding a banker willing to lend is as hard as finding a liquor store that makes home delivery on Sunday.

That’s largely because the equity most homeowners have is negative. Houses are down about 30% since ’07. Any buyer who bought or refinanced a house in the last four or five years is likely to be under water.

Even in normal circumstances paying off debt is a long, hard process. Mortgage debt is long-term. Paying it off is long-term too. Many people see years of painful scrimping and saving ahead of them.

What they would all appreciate is a little help from inflation. Inflation lightens the load. It increases nominal incomes while holding mortgage payments steady. It increases nominal ‘equity’ too.

House prices tracked inflation for a hundred years. It was only in the last ten years or so . . .

Click here for the rest of Mr. Bonner’s commentary on The Daily Reckoning, UK Edition.

Higher-than-expected U.S. jobless claims and producer prices data helped precious metals erase larger losses from earlier in the day.

This followed a fall in U.S. retail sales data on Wednesday, which dented sentiment that had boosted equity and commodity markets and signalled the economy’s troubles were far from over.

Spot gold was at $925.55 per ounce at 1407 GMT, from $925.45 late in New York on Wednesday, when it touched a six-week high on buying by gold-backed exchange-traded funds.

“The jobs data is worse than forecast,” said James Moore, an analyst at The Bullion Desk.com. “It’s a bit of a reality check that maybe the recession in the U.S. is going to take longer to crawl out of and the markets have got a little bit ahead of themselves.”

U.S. gold futures for June delivery on the COMEX division of the New York Mercantile Exchange were up 10 cents to $926.00 an ounce.

European shares extended losses on Thursday after the jobless claims, though they later flattened out. Losses on the equity markets have benefited gold in recent months, as investors buy bullion as a haven from risk in other markets.

“We think equity markets have overcooked the upturn,” said Michael Lewis, global head of commodities research at Deutsche Bank.

The dollar gave up gains after drifting higher against the euro following the weak U.S. retail data, which kept risk aversion high.

Gold typically moves in the opposite direction to the U.S. currency, to which it is often bought as an alternative investment. However, the usual relationship between the two has recently weakened, as both react to risk aversion.

BULLISH

With the world economy not out of the woods yet, analysts saw higher price prospects for gold.

“We’re bullish for the next couple of months. We feel that these reflationary trades…are now going to be under attack and those sorts of environments do tend to see flows into gold ETFs,” Lewis said, referring to recent gains in copper and oil prices.

The world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust (GLD) , earlier said holdings had risen to 1,105.62 tonnes as of May 13, up 1.53 tonnes from the previous business day for the first gain in a month.

“The inflow is still marginal relative to the massive gold inflows seen in the first quarter this year,” analysts at Commerzbank said in a research note. “In this context, we view the upward potential for gold as limited at present.”

Platinum was at $1,107.50 an ounce from $1,111.00 while silver was at $13.89 from $13.94 and palladium was at $222.50 against $220.50.

May 14 (Reuters)

The rate of housing starts jumped 22% from January to February, with work beginning on an annual rate of 583,000 homes, the Commerce Department reported. Construction on multi-unit houses surged 82%.

The study also showed that housing starts fell 24.6% in the West compared with January 2009, but they gained in the Northeast (88.6%), Midwest (58.5%) and south (30.2%).

Compared with February 2008, housing starts are down 47.3%.

“That is an encouraging sign for the U.S. economy. It is good signal of what is to come,” Matt Esteve, foreign exchange trader at Tempus Consulting in Washington, told Reuters. “With the rally in equities we hopefully have seen a bottom for the economy here.”

Analysts are optimistic about the stats because housing starts signals some healing in the housing market, which is vital to the overall financial recovery.

More new houses being built means that the banks are returning to lending, consumer spending is returning, and that construction companies are buying more supplies and they hiring more workers.

Increased business spending and people on payroll are vital for consumer demand to return as well, but it will be a while before that happens.

Producer Prices Flat

Also today, the Labor Department reported that producer prices rose 0.1% from January to February, less than expected and much lower than the 0.8% rise from December to January.

“There’s just a huge amount of slack now in the U.S. economy and the global economy” that’s keeping prices down, Scott Brown, chief economist at Raymond James & Associates Inc., told Bloomberg. “That’s going to hang around for some time.”

But producer prices are just one of three main stat lines that measure inflation. Another, the price of imports, fell 0.2% in February, the Labor Department reported last week.

Statistics on the last, consumer prices, will be released tomorrow morning.

Source: Housing Starts Rebound, Producer Prices Slide in February

A steep drop in commodities prices has dampened inflation expectations significantly in recent months. But despite declines in consumer and producer prices, the Fed’s monetary base – the amount of total amount of a currency that is either in the hands of the public or in the central bank’s reserves – has expanded by 80% in the past six months.

Meanwhile, the Fed’s balance sheet has ballooned to $1.8 trillion in assets from $959 billion over the past year.

However, Bernanke argued yesterday that that many banks are opting to keep their capital on the sidelines and that “a significant shrinking of the balance sheet can be accomplished relatively quickly.”

“Some observers have expressed the concern that, by expanding its balance sheet, the Federal Reserve will ultimately stoke inflation,” Bernanke told journalists at the National Press Club. “The Fed’s lending activities have indeed resulted in a large increase in the reserves held by banks and thus in the narrowest definition of the money supply, the monetary base. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base.”

Bernanke added: “At this point, with global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term; indeed, we expect inflation to be quite low for some time.”

Still, as credit markets and the economy begin to recover inflation could make a speedy recovery.  Should that happen, the Federal Reserve will have to act quickly, something Chairman Bernanke says he is prepared for.

”The Federal Reserve will have to moderate growth in the money supply and begin to raise the federal funds rate. To reduce policy accommodation, the Fed will have to unwind some of its credit-easing programs and allow its balance sheet to shrink,” he said. “A significant shrinking of the balance sheet can be accomplished relatively quickly, as a substantial portion of the assets that the Federal Reserve holds…are short-term in nature and can simply be allowed to run off as the various programs and facilities are scaled back or shut down.”

To increase transparency and give the market a better sense of the Fed’s expectations, the FOMC will publish long-term projections for the economy, particularly inflation.

The FOMC’s projection of inflation over the next five years, he said, “may be interpreted … as the rate of inflation that FOMC participants see as most consistent” with price stability and maximum employment.

By releasing longer-term projections The Fed seems to be edging closer to an “inflation target,” which is something already utilized by central banks in Europe, as well as an objective Bernanke himself lobbied for in the past.

The FOMC believes that the optimal inflation level over time between 1.7% 2%, according to the minutes from its Jan. 27-28 meeting.

The producer price index (PPI) rose 0.8% in January, after falling 1.9% in December the Labor Department said today. Core prices, which exclude food and energy, rose 0.4%. Consumer price data for January is scheduled for release Friday.

“It is doubtful that the price increases will be able to stick given the weakening economy and rising unemployment,” James O’Sullivan, a senior economist at UBS Securities LLC told Bloomberg News. While “inflation hasn’t collapsed yet, the big concern is still that inflation will fall too much.”

Source: Federal Reserve Chairman Bernanke Not Yet Worried About Inflation

“What’s different?” asked colleague Manraaj Singh at this morning’s conference.

Early every morning, while most Americans are still in their beds, your editor joins a group of analysts and financial journalists to discuss the day’s news.

“What happened to the price of copper? Why are Asian stocks going down? Are they really going to cut rates today?” The answers are not always satisfying, but the questions keep coming.

And the question this morning was: what has really changed?

U.S. stocks held steady yesterday, but they’re down 5% so far this year. The dollar held steady yesterday too, but it is down for the year too – about 6% against the euro and the yen. The Europe- or Japan-based stock market investor has lost more than 10% of his money.

Meanwhile, the fall of the dollar has increased prices for imports. While the United States used to “import deflation” from Asia and elsewhere, now it imports inflation. Prices are rising all over the world.

Yesterday, European producer prices were reported rising at 6.1% per year. High prices have caused the biggest drop in retail sales on record. And yesterday, they had to call out the riot squad in Brussels, to battle fishermen who were kvetching about high fuel costs.

In China, retail prices are rising at an 8.5% rate – the fastest in 12 years.

In Russia, prices are going up at a 14.39% rate.

In Vietnam, the consumer price inflation rate is running at 25%.

In Venezuela, the inflation rate is 29%.

And in Zimbabwe…well, Zimbabwe is another story altogether, with inflation going up so fast they can’t even measure it. Prices are said to be increasing at 160,000% to 200,000% per year. But who can tell? There’s nothing to buy.

Back in Asia…the region’s central banks had hoped that Milton Friedman was wrong. They had hoped that a worldwide economic slowdown would reduce domestic inflation rates. So, they left their lending rates low – considerably lower than the CPI – in order to keep their economies turning over. In Thailand, for example, the central bank lends at 3.25%, while consumer prices rise at more than 6%.

Sound familiar? The United States also keeps its key-lending rate well below the inflation rate – and for the same reason. The Fed lends at 2%. Inflation was last clocked running twice as fast.

We pause here in honest admiration for our fellow investors – the kind of admiration we feel for members of a bomb disposal unit, or a knife-thrower’s assistant. What are we to think? They are lending money to world’s biggest debtor – the U.S. government – for 10 years at 3.94%. That’s yesterday’s yield on the 10-year T-note. If nothing changes, they will get nothing for their trouble. If inflation rates rise (or just happen to be understated), or the dollar falls, the speculation will blow up in their faces.

But along comes Ben Bernanke, with an apparent change of brain. Now, says the captain of the Fed’s rapid response recession-fighting team, further inflation is unwelcome in the United States of America. Supposedly, these words alone took $5 off the global oil price.

But what really has changed? Can the U.S. central bank really begin fighting inflation in a serious way?

The feds have discovered the same two things that their Asian central banker colleagues have found out: that the globalization street goes both ways…and that Milton Friedman was right. Inflation is a monetary phenomenon, observed Friedman. When you increase the amount of money in circulation, ceteris paribus, prices are going to go up. That they didn’t go up much in the last 15 years is merely because there were important other trends going on – notably, globalization, which was driving down prices. But now, traffic on the Avenida de Globalization is going in the other direction. And just as it was very difficult to cause inflation while globalized markets were cutting prices, so is it very difficult to stop inflation when globalized markets are increasing them.

*** Can the Fed really begin fighting inflation? Ah, dear reader…do you see the cruel twist to the story?

While the Fed couldn’t seem to create inflation in those wonderful years of the Great Moderation…now, it probably can’t do much to stop it. The U.S. imports an Everest of stuff from overseas. And stuff made overseas is becoming more expensive. The Fed can raise rates to try to cool the U.S. economy and reduce the amount of stuff Americans buy. But those darned Asians and Europeans can still buy more, and prices can still go up.

Besides, any further ‘cooling’ of the U.S. economy is risky. It could freeze up.

The crisis is said to be over on Wall Street. But the Financial Times says new IPOs are being taken off the schedule…short action on Lehman Bros. is at a record level (speculators are betting that the company is going down) and Moody’s says it might downgrade credit ratings for MBIA and Ambac.

The money just isn’t flowing as fluidly in Manhattan as it used to. An AP story tells us that apartment sales were off 21% in the first quarter. And over on Long Island, where the Wall Streeters have their weekend homes, lenders are said to cutting off home equity lines.

In the center of the country, bankruptcy filings are up 27% in Illinois. And out in Las Vegas, the mortgage fraud capital of the world, a $5 billion casino project has just been cancelled.

And this just in – California is officially suffering a drought.

Under these conditions, we’d expect Ben Bernanke to make some gestures toward protecting the dollar and reducing inflation. But we’d also expect that most of the air coming from the Fed will be hot, not cold.

“The Fed seems to be trying to create a situation whereby they are seen to be fighting inflation, simply by not lowering rates any further,” says MoneyMorning. “This is because, while the Fed may have no interest in fighting inflation, they have a big interest in fighting what they call ‘inflationary expectations’. In other words, they are more interested in fighting people’s perception of the problem, rather than the problem itself.