We’re talking about inflation.

First a word of caution. Everything that MUST happen DOES happen. But it doesn’t always happen when and how you think it should. We warned about the coming end of the Bubble Epoque for 10 years before it actually happened. Now, we’re warning about inflation coming. Readers may draw their own conclusions.

“In a world of debt and deflation,” writes Crispin Odey in the Financial Times , “inflation is our friend.”

The Financial Times is required reading among policy makers. They read it to find out about the latest fashions in their trade. In a matter of days, they are wearing the season’s new styles themselves.

The world’s financial authorities have a duty to maintain the integrity of the financial system...which means, maintaining the value of the currency. Those that lived through the ’70s have a horror of inflation. They feel they must fight against it...protect against it...and keep an eye out for it. Yet, in front of them is the worst financial crisis since the Great Depression...

Bloomberg reports that 236,000 houses were foreclosed in 2008. In California, house prices are already down 42% from their peak...and still falling.

And just yesterday, Boeing lost its first order for 787 Dreamliner...and announced that it would have to let 10,000 workers go. Starbucks said it would turn 6,700 of its people loose. And the International Labor Organization in Geneva estimated that as many as 50 million people worldwide could lose their jobs “if the situation continues to deteriorate.”

The situation is continuing to deteriorate. “There’s not a moment to spare,” says President Obama. We have to fix things.

But how?

There are only three choices, says Martin Wolf in the Financial Times . Liquidation. Inflation. Or Boondogglization.

Here at The Daily Reckoning , we’ll take the first solution. Let the chips fall where they may...clear the market...and then get on with things.

“To choose that option must be insane,” says Wolf. Ooooh... Well, we’re not going to be provoked by that kind of low-bred name calling. We’ll take the high road: sticks and stones will break our bones, but words will never hurt us. Wait...why not...Mr. Wolf is a moron!

He – and most of the ‘responsible’ commentators – like the third solution, a devil’s pudding of sugar-coated carrots and wet-noodle sticks including Keynsian spending, bailouts, massive infrastructure projects, giveaways, new regulations, new programs...a little of this...a little of that...adding trillions in public debt and hoping that the economy grows its way out of it. In the confusion of the crisis, you can also expect the Obama government to sneak in a total overhaul of the nation’s health care system...and maybe its education system too.

So far, boondogglization is the policy the feds have favored. It’s as though a liquor truck had over-turned in a bad neighborhood. Within minutes, people are out in the street grabbing every unbroken bottle.

In Mr. Obama’s relief plan, for example, there are free drinks for almost everyone. Wall Street financiers. Bankers. Homeowners. Builders. Steelmakers. The House of Representatives – guardians of the nation’s purse – took a hard look at it...red-penciled $6 billion out of $825 billion...and let it pass.

But little by little...day by day...the policy makers are being drawn towards the second solution: inflation. Boondoggles aren’t enough. Borrowing and taxing alone won’t do it. A dollar borrowed or taxed merely transfers it from the hands of the person who earned it to the hands of someone who didn’t. What the system needs is new money. More money. Money that isn’t stolen or defrauded from someone else. And economists are beginning to realize it.

*** The opinion mongers are softening up the world’s head. Inflation is not such a bad thing, they keep saying. A little inflation will, in fact, be a good thing. Crispin Odey’s analysis is closer to our own than most others. The problem, he says, is not credit; it’s debt. The authorities may be able to increase credit by throwing money to the banks; but people who are deeply in debt are still bad credit risks.

Martin Wolf, at the Financial Times , outlines the size of the debt problem:

“Let us start with some facts. The ratio of US public and private debt to gross domestic product reached 358% in the 3rd quarter of 2008. This was much the highest in US history. The previous peak of 300% was reached in 1933, during the Great Depression.

“Nearly all of this debt is private. That reached an all-time high of 294% of GCP in 2007, a rise of 105 percentage points over the previous decade.

“Particularly remarkable is the composition of the increased debt. In the early 1930s, most US private debt was owed by non-financial companies, so balance sheet deflation occurred in companies, as was also the case in Japan in the 1990s. This time, however, the big increase in debt was in the financial and household sectors.

“Over the past three decades the debt of the US financial sector grew six times faster than nominal GDP. The consequent increases in its scale and leverage explain why, at the peak, the financial sector allegedly generated 40% of US corporate profits....

“Household debt – most of based on rising housing values – rose from 66% of US GDP in ’97 to 100% in ’07”

What to do with all this debt?

“If central banks and governments are aggressive enough, they can generate inflation which will lower the debt burden,” Wolf writes. “But they will imperil – if not terminate the experiment with un-backed fiat (or man-made) money that started in 1971.”

Yes...exactly...that is what we expect.

“The world’s total outstanding debts have to be reduced,” continues Mr. Odey, clearheadedly. “Our populations and companies need the means and the time to pay them off. These means are profits and pay rises.”

Not much the feds can do about profits and pay rises – at least not directly. But the last part of Odey’s formula sounds like a winner to us:

“The other thing we need is inflation...

“Inflation will allow debt to reduce day by day. Price rises will make companies going concerns, earning their way back to profit. Pay rises will enable households and consumers to pay down what they owe while saving more and spending some. And inflation allows interest rates to rise but still remain negative in real terms. It is healthier that people receive an annual pay rise than take out an extra annual loan – as they have been doing since 2000. This package will allow markets to breathe again.”

Inflation is coming back into style. Count on it.