Another triple-digit swing for the Dow yesterday. The index shed 130 points a hefty jump in wholesale inflation brought Wall Street flighty optimism down to earth once again.

The Producer Price Index rose by 1.2% in July, more than double the expected rate. The rate for 2008 is now the highest level since 1981.

Who’s to blame? Addison Wiggan and Ian Mathias at Agora Financial’s 5 Min. Forcecast are pointing the finger at Ben Bernanke. The Fed has loaned, on average, $17.7 billion a day last week to US commercial banks – an all-time high.

Expect to see an increasing amount of “funny money” in the US, Bill Bonner said yesterday. He was reacting to news that government is primed to bailout Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE).

The two lenders are said to be worth about a negative $50 billion each – for a grand total of $100 billion. Of course, the feds don’t exactly have a spare $100 billion lying around. But so what…they’ve got plenty of funny money. As the endgame comes for more American businesses and households, you can expect to see a lot more funny money passing itself off as the real stuff.

Central banking, says Bill, almost guarantees inflation…

Neither the people nor the theories in modern central banking have changed. They are committed to a system with the dollar as its foundation…a system that ALMOST guarantees inflation.

We don’t know what will happen – every day is a new day, after all – but we know how these central bankers think. And the more a recessionary downturn grips the world, the more Bernanke & Co. will fight against it. And they fight dirty – with counterfeit money.

Dan Denning, the editor of The Daily Reckoning Australia, also sounded the alarm yesterday over inflation…

Have the markets already gone through their inflationary melt up phase? Are they now giving way to debt deflation, in which cash is hoarded and the price of all assets (tangible and otherwise) falls?

Well…no.

It’s true that gold prices tripled in the last eight years. The oil price went from a ho-hum mid twenties to nearly $150. And across the commodities complex, from energy to grains to base metals to precious, nearly everything went up.

But that was not hyperinflation. Nor was it merely a speculative bubble (something that’s becoming increasingly popular to say). This first up-leg in the commodity cycle represented the bottom of a 200-year trend in which tangible goods declined in real terms because production expanded faster than consumption (thanks to industrialisation). Now consumption is catching up with stagnant production (thanks to India and China.)

Hyperinflation is the end game of a fiat currency system. It results from the monetisation of debts by the central bank in attempting to deal with the consequences of a credit bubble. Or, to apply it to the real world in the form of a question: How do you think the Federal Reserve and the Treasury Department are going to recapitalise America’s financial sector? With Chinese savings? With Sovereign Wealth Funds?

Answer: The Fed exchanges what remains of its stock of Treasury bonds for garbage mortgage debt (there’s plenty more on and off bank balance sheets).

Eventually, when it runs out, it will have to buy more bonds floated by the Treasury. And where will the money to buy those bonds come from? Where it always comes from when you have a fiat money system: out of then air!

In any event, the bailing out of the Government Sponsored Enterprises and the attempted recapitalisation of the U.S. financial system with magic money is just around the corner.

Of course, higher inflation means the feds are more likely to hike rates. According to a report by Reuters:

The U.S. Federal Reserve must be ready to take action if slowing economic growth fails to curb inflation stemming from higher food and energy prices, two top Fed policy-makers said on Tuesday, indicating that higher interest rates may be needed.

Richard Fisher, president of the Dallas Fed, and Jeffrey Lacker, president of the Richmond Fed, both of whom are known for their hawkish stances on inflation, warned that vigilance on price pressures is necessary even as oil prices have come off their peaks.