ebear, i think the die was cast in march, ending the inflation debate forever. there were subtle clues long before that, going all the way back to the appointment of bernanke as fed chairman. if we were going to liquidate much of our banking industry (and others) and liquidate debts, and endure a long, deep recession, bernanke would not be the man at the helm.

I agree with that statement, in fact I think it goes much further back. The die was probably cast in 1997 with the bailout of LTCM. It could even be argued that the die was cast in 1987 when Greenspan did his first of many rate cuts to rescue Wall St. from itself.

At the root of the problem is excess money creation - money for which there is no corresponding production, and that situation goes back at least a half-century. Inflation (and subsequent collapse) is the eventually outcome - I'm just not sure we haven't seen that already and are currently basking in the afterglow.

To pursue inflation as a policy you have to have something to inflate that the banks can arbitrage, but we seem to have run out possibilities. What's left? It has to be big enough to absorb all the new money, yet at the same time not directly impact fragile trade and currency relationships.

At some point, enough is enough and people start looking for a way to disengage, just like cutting off a brother-in-law who keeps borrowing money and never pays you back. That was the point of Doug Noland's article - that the cycle of in and outflows of capital based on the US as ultimate safe haven may be drawing to a close. When the next shoe drops, as it surely will, we may have an answer. If the Treasury market doesn't catch a bid at that point, watch out. I think that test could come as early as this fall.

let me hasten to add that there is always the potential for a deflationary depression. all that is necessary is for the fed to refrain from propping up the markets (credit, debt, equity, everything.) if the government stood aside, we would see an economic crash almost immediately. and by that i mean a global economic crash, not just the united states. when the american consumer stops spending, japan's auto industry is in trouble. china's growth rate drops below the level needed to keep people from rioting in the streets.

Japan has the same problem as the west - an aging population drawing down resources with fewer workers to support them. In addition, they exacerbate the problem by restricting immigration from China and Korea which would, at least on the short term, take some of the pressure off.

China's situation is even more pressing. Following Japan and Korea, they based their economy on export trade, but due either to their size or political conditions, seemed unwilling to make the shift towards more domestic investment and consumption, along with a move to high end-value added products.

However, given the pressure they're under from a seemingly intractable western financial crisis, they may be forced to take that road, along with Brazil, India and others whose economies are under pressure, but who collectively could, potentially, replace the US as a buyer of each other's goods. I see this trend emerging as we speak. The need to diversify, both internally and externally is very clear at this point. Once that road is taken, a new economic reality will take shape. In the same way as Britain declined in economic importance post WWII, we may see that with the USA. The image of global superpower will be retained for domestic political purposes, but the basic element of power - control over world money flows - will essentially be gone. The question of what replaces that is a point on which, as investors, we ought to focus.

Nobody likes to visit the dentist, but if your tooth is causing you unbearable pain, you go. I think we've reached that point. Significant shifts in global trade and currency relations will be the result. Something I'm focused on, and will continue to report on here.

ebear